UK regional air connectivity fund – which airports does it help? And what is a ‘region’ anyway?
In his 2014 Budget the UK’s Chancellor of the Exchequer delivered a couple of surprises for the air transport industry. Firstly and in the face of global criticism of his previous policies, he adjusted rates of Air Passenger Duty (APD), lowering them for long haul journeys and also changing the banding structure in favour of some countries that had previously been penalised.
But the Chancellor also invoked a previously little known regional air route development fund, saying he would expand it to GBP20 million to “provide start-up support for new routes from regional airports to increase connectivity and boost local economies."
The shortcoming with this ad hoc policy is the airports involved are only those with less than three million passengers a year. It is hard to see what significant impact such a policy would have, even if it might save one or two from closure.
One external factor that could weigh on this policy is the publication in Feb-2014 of the European Commission’s latest guidelines - under which only Europe's very smallest regional airports would be able to continue receiving any kind of state subsidies.
Under those guidelines, operating aid for airports with more than 700,000 passengers per year will have to be curbed, though this is higher than the 300,000 cap the Commission had been considering. The implications of these guidelines on the UK Government’s scheme is not yet clear, so is overlooked for the purposes of this report.
Defining a "hub" is a political art
One of the problems in the UK is understanding and interpreting air transport terminology, because it is bandied around by politicians often to suit their own purpose and, as often as not, out of ignorance.
The word ‘hub’ for example, is typically and traditionally used in the context of a hub and spoke system airport, where the hub handles waves of interconnecting flights. “There is only one hub airport in the UK and that is Heathrow”, the CEO of Heathrow Airport Holdings, Colin Matthews, frequently notes. But there is hardly any airport in the UK that satisfies that description. Heathrow Airport itself developed randomly as a hub and even today there is less planned connectivity than there is at, for example, European continental hubs such as Zurich or Vienna, or Gulf examples such as Dubai.
But even if there were, the word ‘hub’ is also used as a substitute for ‘base’ in the UK so that if someone is promoting the idea of how big the easyJet ‘hub’ at Gatwick could get, it is uncertain whether they are referring to the cluster of point to point activity by that airline there or to the propensity for it to begin operating a hub and spoke network to rival British Airways at Heathrow.
And "regional" airports are similarly ambiguous
Similar circumstances apply to ‘regional airport’. There is no formal British definition of the phrase and most often it is used to describe non-London airports, i.e. those ‘in the regions’ of the UK. But even London Stansted Airport has been referred to as a ‘regional airport’ in recent years in professional papers so an alternative interpretation might be ‘any airport that is not London Heathrow or Gatwick’ (or even ‘that is not Heathrow Airport’).
But where would that leave London City Airport for example? It is the only London airport (of six) that is actually in London but it could be argued that it has its own ‘regional’ catchment area, particularly amongst the financial sector skyscrapers and attendant apartment blocks of Canary Wharf.
If we accept the definition of regional to mean non-London airport then the announcement of an extended regional air route development/connectivity fund would go some way to answering the prayers of most of the airports around the UK, who were overlooked by the enormously London-centric Interim Report of the Airports Commission in Dec-2014 with the exception that some provision was made in it about the need to connect them better to Heathrow.
Certainly the main provincial airports that are situated in heavily built up areas and which serve cities or city-regions that are included in the list of 296 ‘global cities’ drawn up by Loughborough University (even if they are several leagues down from London) might be expected to be smacking their lips at the prospect of state aid to enhance their route networks. The main two are Manchester and Birmingham in England while fast-growing Edinburgh would consider itself a candidate in Scotland (which could be a separate country within six months, of course).
And it would not be the first time those airports had been recipients of central government largesse. It may be pertinent here to look back at previous air route development schemes in the UK and the rules that governed them.
Air Route Development Funds (RDFs) around the world currently come in many forms
- Airport support:
- Discounted landing fees – costs absorbed by airports
- Funding granted to allow airports to give deeper discounts
- Marketing and partnership funding
- Infrastructure Investment
- Less targeted but often not classed at State Aid if in a development region
- Public Service Obligation (PSO, also known as Essential Air Service)
There are a wide range of types of support. Other less obvious forms include access to slots, and training.
Five UK air route funds in the 2000s
The Air Route Development Fund for Northern Ireland
This was initiated because the province of Northern Ireland has historically been poorly served with direct scheduled international air services. The devolved administration there identified route development as a key component of industrial and (inward) tourism competitiveness. Following Scotland’s lead (see below) it established a Fund in Nov-2003, worth GBP4 million, spread over three years, with a possible extension. Prior to the launch of the Fund, Northern Ireland had only a single daily international service from Belfast to Amsterdam.
The Fund was operated by a company called Air Route Development (NI) Ltd, created by the Department of Enterprise, Trade and Investment and Invest Northern Ireland.
After the Fund was instigated, over twenty new scheduled routes were launched, of which nine routes received direct investment from it. The Leeds-based LCCJet2 set up a new base at Belfast International Airport but was not supported by the Fund because of the nature of its routes – they were all outbound vacation routes that would not significantly aid local business.
In a similar fashion two new vacation routes by easyJet did not receive support. In addition a new daily Belfast-New York was launched in summer 2005 as a result of the Fund. That was subsequently considered for discontinuation by Continental Airlines [now United Airlines] in favour of a Dublin route in the Irish Republic where aviation tax rates were much lower. However, when the rate of APD for long haul flights out of Northern Ireland was reduced to the short haul rate in 2011 a decision was made to continue with it and that remains the case today.
Northern Ireland RDF – international routes only
The Fund’s investment was limited to the first three years of operation of the new routes. Beyond that period it was anticipated that the routes would be self-supporting. Investment, which was paid on a per-passenger basis, was also limited to load factors of up to 75%.
The Fund’s duration came to an end after five years and it can be regarded as having had a degree of success, especially in the arena of LCC route development, where much greater penetration was needed to compete with Dublin Airport. Traffic increases levelled out at Belfast International, and traffic actually decreased at Belfast City Airport in 2006 but City of Derry airport, the one most isolated by Dublin’s magnetism, increased its passenger numbers by 70% in the period.
Subsequently, some of the Belfast routes were withdrawn, such as Berlin, Geneva, Nice and Rome, while Derry Airport’s development has been erratic and it expects a difficult year in 2014/15. Meanwhile, Dublin Airport continues to claw traffic from Northern Ireland and claims to have handled over 0.5 million in 2013 although there is some reverse traffic from the Irish Republic via Northern Ireland.
The Air Route Development Fund for Scotland
Scotland's fund was a form of a public-private partnership (PPP) between local governments and private businesses. It was established in Nov-2002 in a partnership involving The Scottish Government, Scottish Enterprise, Highlands and Islands Enterprise and Visit Scotland to improve business connectivity and inbound tourism access all year round.
The lack of key transport links to the US and some European destinations was seen as a barrier to economic growth in Scotland. The Fund’s initial budget was GBP6.8 million, spread over three years, and subsequently increased to GBP13 million. It was estimated that the total economic benefit, over ten years, would be worth more than GBP300million and that it would create around 700 tourism jobs.
The aim of the RDF was to promote the development of new routes through the provision of investment support for local airports to reduce landing charges for the airlines selected and for new routes. The targeted routes were primarily to Continental Europe, but in some cases also to intercontinental destinations such as the United States and the United Arab Emirates.
Prior to the RDF, the majority of international traffic to Scotland was routed through hub airports such as London Heathrow. The Fund contributed to a dramatic improvement in Scotland's direct international air network by concentrating only on those routes that helped business and in-bound tourism.
In the 14 years between Jan-1989 and Jan-2003, the total number of scheduled international destinations served from Scotland on a year round basis remained constant, at 17. Following the inception of the Fund, a further 15 new international scheduled destinations were quickly added.
The Fund brought in prestigious full service long haul airlines such as Continental Airlines at Edinburgh Airport and Emirates at Glasgow International Airport, but it also helped set up a variety of LCC routes, including those from Scotland’s main low cost airport, Glasgow Prestwick, all by Ryanair, an airline that was already in situ there.
RDF International year-round services in Scotland, summer 2007
There was little immediate benefit to Aberdeen Airport, which supports the North Sea oil and gas business, a labour intensive operation that attracts manual workers from large metropolitan conurbations and which could benefit from LCC operations. Several new routes did start there, but all by full service airlines.
Strict criteria needed to be met before RDF funding was allocated to Scottish airports. Essentially, a new external direct route had to be of economic benefit to Scotland and predominantly of long-term benefit to business travellers, although it also allowed for strong inbound tourism routes. It had to operate at least five days a week, all-year round and not compete with an existing service. A full economic appraisal was carried out for each prospective route, scored on factors including destination, creation of jobs, number of inbound tourists and journey time saving.
The RDF ceased in that form at the end of May-2007. However, routes that started by that date remained eligible for funding.
Air Route Development Fund for Northwest England
Another RDF was mooted in the northwest of England, home to Manchester, Liverpool and Blackpool airports, and the first in England. It was announced in Nov-2004, to be administered by the Northwest Development Agency (NWDA – no longer in existence) and to run for three years.
The objectives were to:
- Support key business opportunities in terms of both inward investment and export initiatives;
- Promote route development and related initiatives that support identified tourism priorities and projects;
- Increase connectivity to the region;
- Improve the competitiveness of the region’s businesses by allowing European business travel to and from regional airports to be conducted within a day;
- Improve the region’s connectivity to strategic long haul destinations and European hubs.
The Agency’s robust investment application process included an initial market and commercial viability test taking into account financial, economic and environmental aspects and adhering to relevant state aid guidelines.
Again, the object of the Fund was to attract new air services into the region’s airports and specifically to support inward investment, inward tourism and export activities and the competitiveness of the region’s businesses, by improving connectivity into the region and to/from strategic long haul destinations. The NWDA would only invest in those routes that offered a measurable net economic benefit to England’s Northwest.
Northwest England is somewhat different from Scotland and Northern Ireland, which each has its own government. The region is the second largest in terms of both population (seven million) and GDP in the UK, after London and the Southeast, but had fallen behind Scotland and Northern Ireland in terms of inward investment support as government focus fell on those places.
On the other hand and again unlike the other two regions, Northwest England's airports were at completely different stages of development. It is the home of Manchester Airport (Group), one of the largest airports operators in the country, and a considerable generator of business in its own right at Manchester, which had 22 million passengers annually at the time. Liverpool John Lennon Airport had grown dramatically to five million passengers annually courtesy of LCCs but was highly dependent on them.
Blackpool Airport had striven hard to attract any realistic commercial route from a very small base and did succeed in attracting new routes by Ryanair and Monarch Scheduled but they were reduced or eliminated altogether following the central government decision not to allow Blackpool, a fading vacation resort, a licence to operate the country’ s only Super Casino. Jet2.com had set up a small base.
The indication was that any funding in respect of Manchester would be on strategic long haul routes, quite different from the requirement at Liverpool and Blackpool airports, where it would support low cost carriers almost exclusively as long as they were not merely taking vacationers away from the region.
In this particular instance the whole scheme fell through when its instigators left the Agency and the new management opted instead for an infrastructure fund that merely succeeded in supporting an apron at Blackpool for Jet2.com This decision somewhat went against the grain of the RDF philosophy as Jet2.com was denied funding in Northern Ireland (see above) on the grounds it would bring in few business or leisure visitors.
Ultimately, the NWDA RDF never commenced and did not fund any route.
Two other regional funds were also set up, one for Wales and one for the Northeast of England.
The Air Route Development Fund for Wales
This covered a country which is heavily populated in the south in the Cardiff (capital)-Swansea belt, but thinly populated in other areas. The Welsh Assembly introduced an Air Route Development Fund in the summer of 2006.
The RDF was designed to work with the market to support new air services between European Cities by sharing risk during the start-up period. The Fund supported new routes by offering discounts on airport aeronautical charges and assistance in marketing the route for up to three years. Under it, offers were made up to 50% of the cumulative aeronautical and marketing costs. This provided an incentive to start up routes from Cardiff International Airport.
Depending on individual viewpoint the choice of restricting the RDF to Cardiff may have been deficient as there were several other Welsh airports that might benefit from new LCC routes, including a military airfield conversion (RAF Valley) on the Isle of Anglesey in North Wales. Intra-Wales air routes have been conspicuous by their absence and, in fact, the twice-daily route between Cardiff and Anglesey that commenced in May-2007 was supported by a PSO, not by the RDF; the first such PSO in Wales.
The RDF Protocol ended on 31-May-2007. The European Commission published its guidelines on financing of start-up aid to airlines departing from regional airports in Dec-2005 and one of the main changes proposed was the reduction in aid that could be offered, from 50% to 30% from 01-Jun-2007; the conditions and restrictions contained in the new RDF Protocol consequently made the scheme unattractive because of the disproportionate work required to obtain a 30% contribution. As a result, the Welsh Route Development Fund closed to new services that commenced after 31-May-2007.
Two new LCC routes were established Cardiff to Barcelona (Thomsonfly, which is no longer in existence) and Cardiff-Paris (Flybe). Both routes were expected to provide an important stimulus to inbound tourism, as well as improving business, cultural and educational links, and inward investment opportunities.
Support was offered to Cardiff-Brussels and Cardiff-Manchester routes but the operator, Air Wales, failed. Alternative mechanisms were considered to support new routes from targeted markets. The Welsh Assembly Government began looking into the feasibility of establishing a tourism-based and business investment marketing scheme to attract new air routes to and from Wales.
Air Route Development Fund for North East England
One Northeast, the regional development agency for North East England, also established Funds for this purpose. It commenced activities during the financial year 2006-07 with similar terms and conditions to the other Funds referred to here. Routes supported were:
The appraisal process for these UK Route Development Funds is presented in graphical format below.
Overview of the RDF outcomes
The final route development fund that was managed wholly or partly by regional development agencies thus expired several years ago and the RDAs themselves no longer exist, having been closed down by the incoming coalition government in 2010.
The Funds were purposefully set up principally to bring in tourist visitors and aid business, not to promote external vacation routes.
LCC routes typically take more UK tourists abroad than bring foreign visitors in (though there are exceptions, the London airports for example – though they were not covered by any fund - and especially where there are clusters of English language schools for foreigners) and may do little to enhance local business prospects.
But overall LCCs were the winners during the period the Funds were functioning, which is not surprising because that period matched the most rapid growth period for LCCs in the UK anyway.
Assistance to the biggest airport (Manchester) was intended only to sustain and expand long haul, it was exempted from any support for short haul, which was directed instead and Liverpool and Blackpool airports.
One lingering question once the schemes had expired was who would administer the next ‘tranche’ – it was presumed there would be one – as the RDAs were abolished, to be replaced by untried and tested (and far more local) Local Enterprise Partnerships or LEPs, whose brief was restricted to individual counties or city-regions rather than the much bigger planning regions covered by the RDAs.
Another lingering question was whether the LCCs would continue to be the winners in any new funding scenario.
"Connectivity Fund" was initiated to help areas not served by high speed rail
As it happens, these were academic questions because no attempt was made to replace the Funds until 2013, when a strange thing happened.
On a visit to Scotland Danny Alexander, the Chief Secretary to the Treasury in the Westminster government and a local MP there said that a GBP10 million per year Regional Air Connectivity Fund would help ensure that regions outside England’s new high speed rail network (HS2) also benefited from stronger transport links. As it stands HS2 will not cross the border into Scotland and there is still confusion as to exactly where in England it will go.
The announcement came very shortly after easyJet’s statement that a five-year deal had been struck over crucial flights between Inverness and London Gatwick (to replace a route that would end following Flybe’s exit from Gatwick). Mr Alexander was quick to say that the new fund would ensure that regions like the (Scottish) Highlands have long-term air transport security. Inverness Airport’s CEO insisted that without the route Inverness would be ‘off the map’ even though it has routes to London Luton, Manchester, Birmingham and Amsterdam, all offering connection possibilities.
Mr Alexander’s statement could be considered to be politically expedient but little happened in the aftermath before (his boss) Chancellor Osborne’s Budget speech in Mar-2014 in which he ‘re-announced’ the policy as if it was hot off the press (as politicians are apt to do) as a GBP10 million per annum two-year fund (quite time-restrictive compared to the earlier route development funds), “Because we want all parts of our country to see better links with the markets of the future… we’re going to provide start-up support for new routes from regional airports, like Liverpool, Leeds or indeed Inverness.”
Always check the small print
There are several issues that arise immediately from this statement. As with just about every new policy announced in a British Budget statement, the finer details must be known before any sense can be made of it and rarely is anything quite as it seems. In this case Chancellor Osborne might as well have said, “Terms and conditions apply”.
The generosity only applies to the smallest airports, i.e. those with less than three million passengers per annum. It is difficult to imagine how any small airport is going to attract air services to and from “the markets of the future” no matter how much public money is made available to underpin those services because those markets are mainly in the long-haul zone.
Most of the smaller UK regional airports don’t have the runway capability for flights to reach Brazil or Indonesia, even if the potential traffic merited it. Realistically, these airports are in the short haul LCC zone, their passengers jetting away to the sun rather than jetting in to do business, the very services that previous schemes wished to avoid encouraging wherever possible.
He could of course have been referring to the potential for more feeder flights from the small UK airports to (genuine) hubs such as Amsterdam and Frankfurt (not London, they would find it hard to get slots at Heathrow and which airline would operate them anyway?) but in most cases those services exist already anyway and are proven to be viable – they have to be viable even if they are supported for the first two years; the largesse does not last forever.
Then there is the fact that of the three examples Mr Osborne gave, only one of them – Inverness – would qualify under his scheme.
In 2013 Liverpool Airport, even though it has been in sharp and steady decline, handled 4,187,000 passengers and Leeds Bradford Airport (a rapid grower) hosted 3,315,000. It is strange that no-one thought to check the figures before they make the famous red (budget) briefcase.
There are up to 15 airports that could expect to benefit from the scheme where, it could be argued, intervention of this nature would be welcome to encourage short haul route development that might be the difference between the airport surviving and closing down.
Slowly recovering after being acquired by the Welsh government from the private sector (Abertis) but still in intensive care. Better prospects with maintenance facilities;
Also slowly recovering after a government takeover but remains highly dependent on one LCC that has reinvented itself and now seeks the business passengers it is less likely to find at Prestwick;
From 900,000 to 160,000 passengers in seven years and now highly dependent on whether or not airport land can be used for commercial non-aviation purposes;
Perennially in a fight to justify its existence and with just 175,000 passengers in 2013.
But the question needs to be asked – would there be more value in supporting route development at the major city airports? Just as the words ‘hub’ and ‘region’ are so inadequately defined the same situation exists with ‘secondary airport’.
There are in reality four classifications for UK commercial airports:
The sub-primary division is based on the traffic mix rather than the number of passengers. Typically there will be more full service/network traffic than at the secondary airports although there can be some overlap. In essence the three main sub-prime airports are Luton, Edinburgh and Birmingham)
As might be expected the strongest resistance to the Chancellor’s proposals has come from the sub-primary segment; the two largest primary ones already have enough critical mass not to care, and the other two might feel uncomfortable about receiving a ‘handout’.
One of the biggest proponents of support for ‘sub-primary’ airports generally at the expense of secondary and tertiary ones has been Birmingham Airport, which is currently the UK’s seventh largest by passenger numbers and which has a broad traffic mix without an over-reliance on LCCs or charters, as represented below.
Birmingham Airport capacity, seats by carrier type, 31-Mar-2014 to 06-Apr-2014
Birmingham was recently featured in a related report - Birmingham Airport shows the value of marketing, to deliver the first UK non-London Chinese flights – on its attraction of charter flights to and from China, the first UK airport outside of London to secure any sort of direct Chinese air service.
The airport management expressed “disappointment” that the scheme to boost new routes via the new GBP10 million per annum fund would only apply to smaller regional airports with less than three million passengers per annum.
The airport’s CEO, Paul Kehoe said, “Whilst the ...Fund...is good news for our smaller, more peripheral, regional airports, it does not help make best use of capacity at airports like Birmingham because airports in our great regional cities are not included.”
There is a plethora of secondary and tertiary airports
Mr Kehoe has previously criticised the plethora of secondary and tertiary airports across the UK, many of which are supported almost exclusively by budget airline services that can be transient, and of which many are cash-strapped, and has stated that in his opinion there are only six or seven British airports outside of London that have any real value, all of them located in the network of ‘great regional cities’ referred to above.
In Jun-2013 and as part of Birmingham’s response to the UK Airports Commission, it set out a vision in which London, Birmingham and Manchester would all have the great long-haul airports that they need to succeed, whilst at the same time providing flexibility and resilience for the UK aviation sector.
While Mr Kehoe has been the most vocal on this subject it is unlikely that the thinking in the boardrooms of GIP (London Gatwick, London City and Edinburgh airports) and Manchester Airports Group will be at any great variance even though MAG operates at least one airport that would qualify for support.
But these ‘great regional city airports’ cannot survive on long haul traffic alone and they seek short haul services, including low cost flights, as much as do the secondary level airports. Is it true to say that those LCC services have no value to a region because they are not anchored on a ‘great regional city’? Road distances are not long in the UK, and it is not inconceivable that an airport such as Liverpool might be considered an alternative airport for Manchester for example, as it is located only 35 miles distant.
It is felt in industry organisations such as ACI that British secondary airports do fulfil a role in providing local business support to encourage the growth of trade. They do that for sure, but it is only part of the story of how secondary airports have developed in the UK at the behest of the LCCs. To understand this it is necessary to accept the theory that there is little detailed forecasting going on in many budget airlines to substantiate the need for a route.
Opinions on this are polarised. While ICAO and ACI might argue there is, those industry analysts that have worked at the coalface might suggest that the dominant philosophy now is one of ‘let’s try it and if it doesn’t work we’ll try somewhere else”. The amount of routes that Ryanair, for example, closes each year as well as opens might suggest there is some truth in this. Little appears to be planned for the long term.
A myriad of air passengers is criss-crossing the UK by car
Taking this theory to the logical conclusion it is often of more value to an LCC to serve a city from just a small handful of secondary airports around the UK, and especially so if the majority of the traffic emanates from the expatriate community of the foreign country, for example Poland, or Latvia, or Bulgaria. When the alternative mode of transport is a bus that takes over two days and nights to make the journey the potential air travellers will not wait for an air service to start from their local UK city; they will make the journey by road to the nearest airport from where such a service operates even if it is hundreds of miles away. And quite often on these (infrequent) services that sometimes are only twice weekly the passenger complement is made up exclusively of expatriates.
So on any one day there is a myriad of people criss-crossing the UK via its motorway network in order to take a budget flight from an airport that could be hundreds of miles away.
The sub-primary airport operators might argue these arrangements are inadequate on two counts:
- They do not serve local community business and inward tourism interests (which was the objective with the Route Development Funds); rather they pander to a new breed of outbound traveller, whose purpose is not so much vacation as VFR (visiting friends and relatives back home);
- If such services are going to be operated it makes more sense for them to be condensed into the big city airports, where most of the putative travellers will reside anyway.
Newcastle Airport seeks the transformative effects of long haul flights
Birmingham Airport is not the only one to express annoyance with the Connectivity Fund in this manifestation. Another airport that will miss out is Newcastle, which handled 4.4. million passengers in 2013, putting it well outside the qualifying range. A local MP immediately tabled questions in Parliament to Mr Osborne to clarify which airports will be eligible for the scheme.
Newcastle benefitted enormously from the introduction of a daily air service by Emirates in 2007 and specifically in terms of exports, not only to the Gulf, but also beyond, into Asia and Australasia. More than GBP250 million of UK exports were shipped through Newcastle Airport in the last year. It is for that reason the airport now seeks a complementary transatlantic service (American did plan a New York service in 2005 but withdrew because of high jet fuel prices and economic conditions in the US airline industry), to have “an equally transformative effect for the North East.”
Ironically, one of the factors that might help Newcastle achieve its aim is if the nearby Durham Tees Valley Airport were to close (see table above), which is possible although the owners, the Peel Group, have a diversifying master plan in place for that airport. The Newcastle management could argue that with only one regional airport for the northeast of England the three million ppa limit could be waived.
There will certainly be much political lobbying going on in the halls of Westminster right now.
Overall, RDA results are mixed, the policy outlook is mostly muddled - leaving the field open to political lobbying
- The original route development funds in the 2000s were very specific as to the type of route that could be supported: mainly to encourage business and inbound tourism. For that reason LCCs were not always ‘welcome’ though many such services did actually commence. They were organised by the public sector or through PPPs. As regional schemes they did not omit sub-primary airports though those airports were limited to long haul route support;
- Few start up long haul services were actually started;
- It is not yet clear how the European Commission guidelines on state support to airports will impose on the UK government’s recycled 2014 connectivity scheme;
- Early indications from the government is that the extended 2013 connectivity scheme will apply only to airports with less than three million passengers per annum. It will be national, not regional, but the public sector administrators may have to be Local Enterprise Partnerships;
- There will likely be intense lobbying by sub-primary airports against that position.