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UK Airports Commission recommends Heathrow Airport. UPDATE: House of Lords hearings 15-Jul-2015

The final, "clear and unanimous", recommendation of the UK Airports Commission concerning an additional runway in southeast England was made on 01-Jul-2015 after two and a half years of research by the Commission, innumerable submissions by public and private sector organisations, businesses and members of the public and an Interim Report. It is the final chapter – for now! – in a saga that commenced at the end of the Second World War to find a home for a second primary airport for London. (Note however that this Commission had a much wider remit: to ensure the provision of adequate airport capacity and connectivity in the UK).

Quite apart from its direct impact on the winner and loser during the final selection in terms of expansion it will have implications for airport ownership as there may be some comings and goings arising out of the recommendation - even if there is no certainty that the government will accept and implement it. Prime Minister Cameron committed to a decision "by the end of the year".

UPDATE: This report now also includes an account of the appearance of Airports Commission Chairman Sir Howard Davies before a session of the House of Lords Economic Affairs Committee on 15-Jul-2015, possibly his last such public appearance on this matter.

The Commission made clear that expanded airport capacity is crucial for the UK's future prosperity

The potential outcomes prior to the final recommendation (the shortlist) were: 

  • One new runway at Heathrow to the north/west of the existing ones;
  • One runway extension to operate as two runways at Heathrow;
  • One new runway at Gatwick, to the south of the existing one;

Also, a new runway for each of Heathrow and Gatwick was in the running (justified by the fact that two extra runways would be required by 2050 (one by 2030). That was not a formal outcome on the official list but had to be considered a possibility. Equally, there was a very slight possibility that ‘do nothing’ could have been the recommendation.

The analysis showed that expanded airport capacity is crucial for the UK’s long-term prosperity. The report notes that while each of the three schemes shortlisted was considered a credible option for expansion, one was unanimously selected.

The Airports Commission chose to recommend a new runway (and only one) to the north and west of the existing infrastructure at Heathrow, in return for the implementation of a raft of environmental protection measures, some of which are new and untested; a night-time operations ban (replacing an existing quota system and already called into question by schedule publishers); and a handful of other measures.

The runway extension scheme, though cheaper and ensuring fewer homes would be knocked down, was excluded on the grounds it would offer a smaller capacity increase and was less desirable from a noise and air quality perspective.

In contrast, a new full length runway would aid connectivity and its situation further to the west than previous proposals should reduce the number of people affected by noise. The unequivocal rejection of a fourth runway on operational and environmental grounds (the Commission suggested that the government take action in Parliament to rule it out firmly and finally) is a surprise.

It is entirely possible that a third runway could quickly become full as new routes commence, extra frequencies are added and flights transfer from other airports (e.g. easyJet from Gatwick). We must assume that the main motivator here is the environmental one.

The runway is expected to add GBP147 billion in ‘GDP impacts’ over 60 years and 70,000 new jobs by 2050

In making this economic projection the Commission did not overlook freight. As it says, Heathrow is the country’s largest air freight hub. The long-haul links that an expanded Heathrow can provide will support long-term growth in this sector, which plays an important role in supporting trade, including with emerging markets.

However, the Commission took a belt and braces approach by confirming it accepted that there is a role for Gatwick Airport in the future. As a result Gatwick management claimed, along with many others, that it is ‘still in the race,’ ‘the fight is not over’ or words to that effect. Gatwick had put up a determined fight. Its proposal was cheaper and more environmentally ‘friendly’ and Gatwick had claimed it could be implemented considerably sooner.

The Commission explained that the Gatwick scheme was “feasible,” but that the additional capacity would be more focused on short-haul intra-European routes and the economic benefits considerably smaller. The Commission appears to have been swayed by the ‘hub and spoke’ argument for the future direction of air travel rather than the ‘point-to-point’ one espoused by Gatwick. Also that the ‘BRICs’ and other long haul acronyms are more important economically than short haul destinations closer to the UK. That is a little surprising on both counts.

Much evidence points to low cost point-to-point, both short and long haul, continuing to grow, supported by better facilities for self-connectivity, while the way Brazil, China and Russia are going the successful economies in the BRICs are likely to be reduced to ‘I’.

It is also possible the Commission was swayed by the fact the LCC/hybrid easyJet, which began as a proponent of an open and free market solution to the airport capacity conundrum, suddenly switched its allegiance to Heathrow late in the day. On the other hand, easyJet’s arch enemy Ryanair continues to state categorically that it would not use Heathrow under any circumstances, describing it as ‘fantastically over-rated,’ even though the airline admits to having talked with Aeroports de Paris over the possibility of flying into Charles de Gaulle Airport.

The official line at Ryanair is that there should be three new and competing runways constructed in the London area to solve the capacity crisis for 100 years and that politicians should be ‘taken out’ of runway decision making altogether. Furthermore, “it remains a fact that additional runways in Stansted and Gatwick can and will be delivered much earlier than any Heathrow third runway.” 

International Airlines Group CEO Willie Walsh has been quiet so far about the recommendation. Previously he has gone out of his way to play down the likelihood of a third runway ever being built at Heathrow. But then again, he would. While British Airways does not exactly have a monopoly at Heathrow it does have 47% of seat capacity as of the beginning of Jul-2015, its nearest rival in the capacity stakes being Virgin Atlantic with just 6.5%.

With Heathrow being, famously, 98% full, why should IAG embrace more competition? The only comment of note Mr Walsh has made to date is to express concern that any expansion of Heathrow is funded by the airlines and to cast doubt, again, on whether any political will exists to turn the Commission’s recommendation into reality and not to leave it on the shelf gathering dust like its predecessors.

These caveats concerning Gatwick’s future role that were built into the final recommendation are expected to give those opposed to a third runway at Heathrow yet more scope to block progress.

Moreover, the recommendation could be seen as a sort of fudge in that it adds little to the one made in preparation of the 2003 White Paper ‘The Future of Air Transport’ including the environmental protection aspect. But it could also be argued that the Heathrow proposal is more robust than its predecessors.

The government will make up its mind by the end of 2015

No immediate decision will be made by the government, which, through the Department for Transport, will consider the report in detail and outline its own choices in the matter before the end of 2015. At least that is the position as this is written. It will focus on ‘the legal position’ which presumably is reference to EU air quality requirements, an emergency last-minute review having taken place just before the final recommendation was made. Also, the likelihood of acquiring planning permission.

There is intense political and social opposition in Britain to any new runway construction, anywhere; the potential for all manner of legal challenges (the latest suggestion for example was that the successful Heathrow proposal would be built over a landfill site that could not sustain the infrastructure without perhaps even producing the occasional sink hole); and potentially many more years of delay.

While it is now very unlikely the Commission will be asked to revisit any of the proposals that it dismissed prior to its Interim Report in Dec-2013, it is known that there are at least four members of the Cabinet who are against any expansion of Heathrow, including London Mayor/MP Boris Johnson, Foreign Secretary Phillip Hammond, Home Secretary Teresa May and one-time Transport Secretary Justine Greening (all of whom represent constituencies on one or more Heathrow flight paths). Both Mr Johnson and Mrs May will figure in the succession to party leader when Mr Cameron steps down prior to the 2020 General Election. They can be regarded as heavyweights or ‘big beasts.’

Mr Johnson, in his inimitable way, has been threatening to be the first to man the barricades and stand in front of bulldozers at Heathrow. He may not still harbour serious hopes for the revival of his Thames Estuary airport project (though he might), but he has switched his allegiance back to the expansion of London Stansted Airport, as predicted. Stansted’s plus one and plus three runway solutions were rejected in the Commission’s Interim Report in Dec-2013, an action which Mr Johnson has recently described as ‘precipitate.’

Then there is Prime Minister Cameron’s unequivocal statement made in 2009 (in opposition) when previous plans to expand Heathrow fell through, when he said, “The third runway at Heathrow is not going ahead; no ifs, no buts.”

Not everyone favours a Heathrow solution...

There is already much lampooning by opposition MPs of Mr Cameron being “bullied” by Mr Johnson and of being unable to stand up to his forcefulness. That observation would probably be inaccurate if it referred only to Mr Johnson. But there are at least two other ‘heavyweights’ who will impose themselves on Mr Cameron. He might wish to accept their recommendations on this matter over the Commission’s to avoid resignations from the Cabinet so early in the period of this Parliament; especially as the overall majority enjoyed by the Conservative Party is only 12 and Cabinet resignations tend to give impetus to ‘mavericks’ in the party.

One of those mavericks is Zak Goldsmith, the Conservative MP for Richmond Park and North Kingston (also under flight paths). Mr Goldsmith is the son of the colourful tycoon and Leader of the Referendum Party (a predecessor to the anti-EU UKIP party), Sir James Goldsmith, the individual who, it could be claimed, was responsible for ensuring that Britain would never join the euro without the consent of the British people.

This equally colourful character, Zak, once Editor of Ecologist magazine, is in the running for selection for and election as Mayor of London, replacing Mr Johnson. He also threatened to resign as an MP if the government presses ahead with Heathrow.

In an amusing tirade immediately after the recommendation was announced Zak Goldsmith stated, “Sir Howard Davies (the Commission’s Chairman) seems to have begun with a conclusion a few years ago, and spent GBP20m of public money justifying it. Against all the available evidence, he is effectively proposing that we spend vast sums of taxpayer money subsidising the creation of a huge foreign-owned monopoly. It is hugely disappointing that he has ignored the key evidence he received in the course of his work. On every level, Heathrow expansion is the wrong answer. The Commission has now reported, and the Government must respond to it. It will surely conclude that Heathrow’s expansion is neither legally nor politically deliverable. MPs, Council Leaders, residents across the giant flight path will come together in a campaign to make sure of that.”

Hence it is entirely possible that after two and a half years of intense scrutiny and many millions of pounds (GBP) of costs, the Commission’s recommendations may yet be, as Mr Johnson puts it, “vertically filed.” Or will Mr Cameron bite the bullet and do what business is demanding he will do, with several big companies already threatening to quit the UK or scale down their presence over other issues?

Suddenly Mr Cameron is trapped. He must now choose between two equally difficult options: to back Davies and break his “no ifs, no buts” promise, or to overrule Davies and either support expansion of Gatwick (which will annoy many business leaders, including those who support the Conservative Party) or delay a decision yet again, which would do terrible damage to the image of ‘UK plc’ abroad, painting the country as being run by ditherers who are incapable of making a decision.

There are also short-term needs to tackle. Any new runway could probably not come into operation before 2025 at the earliest and realistically it is probably going to be longer. At least there may be opportunities for the private sector in the interim to satisfy increasing demand before then.

Regional airports: winners and losers

Then there is the question of what the Commission’s decision will mean to regional airports. Birmingham Airport’s management will be concerned because it was very anti-Heathrow in its own submissions and had latterly supported Gatwick (mutually). The only response emanating from Birmingham Airport so far, from CEO Paul Kehoe, is that the government must take a cautious response to the Airports Commission’s recommendations. He reiterated the need for a strategic network of long-haul airports throughout the UK, (a feature of both Birmingham and Gatwick airports’ pronouncements for some time) each supporting the comparative economic advantage of that region.

Referring to the significant levels of growth seen at Birmingham in the last three years, since the opening of the runway extension in 2014, and especially in long-haul routes, he urged the Government to “move ahead with caution so as not to damage the ability of regional airports to grow.”

Birmingham will be miffed that the Commission highlighted job creation around Heathrow (+70,000 jobs by 2050) in its final selection. The Birmingham Chamber of Commerce amongst many other organisations had argued that the relatively poor West Midlands would benefit enormously from offering spare runway and terminal capacity on a national basis but this was ignored at the Interim Report stage.

To a lesser degree the Manchester Airports Group will also have concerns. MAG put all its eggs in one basket – Stansted - when it made its submission to the Commission but its two proposals were rejected almost out of hand in the Interim Report. MAG will be pleased to have retained the support of Mr Johnson where Stansted is concerned (assuming he really means it).

It is possible that Stansted could come back into the equation if it appeared that opposition to Heathrow was going to be too well organised and strong, but Gatwick is above it in the pecking order. As for Manchester, it was peculiarly relegated to a supporting role in MAG’s submission, which is now generally regarded as a mistake. MAG has recently resorted to describing Manchester as ‘the UK’s Global Gateway from the North’ (a sort of rejoinder to Heathrow’s persistent ‘UK’s only hub airport’ message, in a belated attempt to reclaim some lost kudos.

One of the reasons that Birmingham and Manchester will be fearful is that both Heathrow and Gatwick fell over themselves to offer hope to the many secondary level regional airports in the UK that the airlines operating at them would in future be able to secure slots from and to those airports at the London airports. Heathrow was particularly strong on this, together with promises on route development funding.

Of course if airports like Liverpool, Durham Tees Valley, Humberside, Doncaster-Sheffield and Norwich, and presently non-commercial ones like Chester, were able to benefit from Heathrow slots, or those that already have Heathrow services (Newcastle, Leeds Bradford etc) were able to increase frequencies, there would be fewer passengers using long haul services at Birmingham and Manchester.

As mentioned in the report http://centreforaviation.com/insights/analysis/us-immigration-pre-clearance-is-extended-in-europe-north-asia-and-caribbean-but-at-what-cost-229961 this is quite possibly a reason why Manchester opted to go after US immigration pre-clearance authorisation, a proposal that is now to be fast-tracked, as that would hand back its initiative.

Another member of the MAG group, East Midlands Airport, which claims to be the largest pure freight airport in the UK, will be pushing hard to expand that role while construction works take place at Heathrow.

So the winners outside London will be the smaller UK regional airports – including those in Scotland, Northern Ireland and possibly Wales, as long as (a) the recommendation is actually implemented and (b) Heathrow sticks to its promises concerning guaranteed slots, a regional pricing structure for airport charges and route development support for routes connecting those airports; and the public service obligation routes envisaged in the Commission’s report are supported. Northern Ireland was the first to stake its claim for guaranteed slots at Heathrow in the wake of the publication of the final report.

The Commission recommendation received a mixed reaction in Scotland

The reaction in Scotland was mixed. Glasgow Airport, which is now a separate organisation from Heathrow Airport Holdings, still backed the recommendation while Edinburgh, which is owned by the same organisation that partly owns Gatwick, opted to state its support for that airport. The Highlands and Islands airports, which don’t have connections to airports in Amsterdam or Frankfurt, unequivocally supported the recommendation, as might be expected.

Response to the recommendation is split between outright acceptance – mainly in the case of business groups and bodies such as airline and airport representative organisations, ABTA, BAR (UK), the Guild of Travel Management Companies, the Confederation of British Industry (CBI), the Institute of Directors, chambers of commerce, the British International Freight Association, the Institute of Logistics and Transport, the Manufacturers Association and tourist organisations (although some of those also support expansion at Gatwick).

Outright rejection mainly comes from environmental organisations (the Green Party, Friends of the Earth, WWF, Greenpeace, the Aviation Environment Federation etc and mainly focused on climate change), local councils on the flight paths, and local pressure groups such as HACAN.

Many airlines and alliances pledged support for Heathrow. EasyJet has already stated it will open a base there, but only when it is expanded. Also, five regional airports together with two major trades unions, GMB and Unite and – as CAPA has noted before – many MPs whose constituencies are not on the flight paths.

In the interim there is work to be done because the new runway – again if it is built – will be 10 to 15 years under construction. The CBI has already restated its mantra that over the time it takes to build a new runway, the United Kingdom could lose up to GBP31 billion in trade by 2030 because of the failure to increase flights to the BRIC (Brazil, Russia, India and China) countries alone.

Short term measures focussed on improving surface connections

But the short-term measures for which submissions were called (and 70 received) are mainly concerned with improving surface access and egress to the airports rather than finding extra short-term runways (for example at Northolt, about six miles from Heathrow, which was proposed as a domestic interim reliever runway for Heathrow).

London TravelWatch published a report in 2014, which it presented to the Airports Commission, and which showed major shortcomings for each of London’s airports. It stated, "as soon as a final decision is made on extra capacity, plans will be needed for a major step change improvement in public transport infrastructure. This means improving connections, providing direct rail links from South London, North West Surrey and the Thames Valley to Heathrow Airport and prioritising electrification of the North Downs rail route which serves Gatwick. Current links just aren't good enough for current demand levels, let alone those projected in future."

The UK Government is working with Gatwick Airport to upgrade the station there and Network Rail is leading a study to improve the rail link between London and Stansted. Meanwhile, the east-west Crossrail will soon provide a new direct route to Heathrow.

As for Heathrow itself, plans are already in place to improve rail connections to and from the airport both locally and long distance, partly through a new junction at Old Oak Common in West London.

However, the proposed HS2 high speed rail line connection at Old Oak Common via a spur line was dropped in 2014 on the basis that “the scheme was likely to attract only a small number of passengers, carry a high capital cost, and represent an inefficient use of HS2 capacity.”

It would be wrong to imagine the Commission's report is the end of the story

The most intriguing aspect of all this is that with so many of the different parties proclaiming loudly and proudly that ‘the fight goes on’ irrespective of a recommendation that ‘is not binding’ on politicians, the entire Commission review enterprise may yet prove to have been an irrelevance. That would be the worst possible outcome for a British establishment already under close scrutiny for its lack of decisiveness on a range of issues.

Business long since ran out of patience. The government cannot afford to delay airport expansion any further if it is serious about Britain punching above its weight on the global stage. That means delivering a new runway at Heathrow as quickly as possible, and leaving the door open to subsequent expansion at Gatwick, Stansted, and key regional airports as well.

For the government, as the Transport Secretary said in Parliament on 01-Jul-2015, the task is to balance local interests against the wider, longer term benefits for the UK. It may yet conclude that this report has not fully done that.

Background Information

Heathrow Airport Ltd is owned by Heathrow Airport Holdings, a consortium of Grupo Ferrovial (Spain), which has been steadily reducing its holding in recent years, and various foreign pension and sovereign wealth funds.

Gatwick Airport Ltd is owned by Global Infrastructure Partners (USA/UK) in consortium, again, with selected pension, investment and sovereign wealth funds. It would not be unreasonable to say that all these powerful organisations were in it to win it; ‘it’ being domination of the supply of airline seats into and out of London and the southeast of England. Nothing less will do.

UPDATE: Sir Howard Davies’ appearance before the House of Lords Economic Affairs Committee, 15-Jul-2015

On 15-Jul-2015 Sir Howard Davies (SHD) of the Airports Commission (AC) appeared at an evidence session before the House of Lords Economic Affairs Committee (HOLEAC) of around 15 members, following the publication of the Commission’s final report, along with the Commission’s Secretary.

The session was SHD’s first appearance in front of a Parliamentary Committee since the publication of the report, and will quite possibly be the last as the Commission has now effectively closed down and he will soon take a new job with the Royal Bank of Scotland. The session’s focus was on the Commission’s economic modelling which used a bespoke model rather than the traditional method of undertaking aviation transport appraisals which consider the direct impact of a scheme on users, providers and government revenue.

But it touched on many other issues and provided some valuable insights into the decision making process, many of which were not revealed in the final report itself.

In advance of the session the HOLEAC advised that the Questions the Committee was expected to put to Sir Howard included:

  • How confident was the Commission that there is sustained demand for additional runway capacity at Heathrow?
  • Can the UK meet its climate change obligations at the same time as increasing aviation?
  • Given that the Commission’s own calculations estimate that the return on investment for a new runway at Heathrow is 8 x investment and Gatwick’s is 13 x investment why did the Commission recommend Heathrow as the preferred option?
  • Why was the Commission so confident that an expanded Gatwick could not serve as a hub airport?
  • Given that many other hub airports have four runways why is the Commission asking the Government to block Heathrow at three?
  • How will a ban on night flights work with the aspiration for more long haul flights particularly flights from Asia? Can the local community be confident the ban will be maintained?

This CAPA report of the event is not intended to be a verbatim account of the session; rather an overview of the event and the issues raised in it. In addition to reporting of the event the CAPA author has inserted several comments.

The initial questions, following a comment from a Committee Member (CM) on the lack of consensus that was apparent following the publication of the report focused on financial matters and what confidence SHD had that money could be found to pay for the runway.

Sir Howard Davies assures financial capability exists

SHD said he had checked with ‘the City’ (of London) about the financing capability, which was positive. It had been verified by the OECD and its subset the International Transport Federation (not to be confused with the International Transport Workers Federation, a trades union body). In response to further financing questions later SHD said Heathrow Airport Holdings was populated with investors that had a long term commitment to it (or so they claim). He had spoken to them and had been convinced by them.

They perceived that institutions and individuals would have an appetite for their bonds. People are clamouring for better yields (as opposed to low bank interest rates) and they would be attracted to an ‘exciting project.’ Of course real interest rates can go up (as they are expected to shortly, the US Federal Reserve having recently put up rates there).

(What SHD failed to mention is that Gatwick is equally populated with investors who have a long term commitment. GIP (42% of Gatwick equity) Transport Director Michael McGhee made the point the day before this session that it would not just ‘walk away with the takings’ if Gatwick got planning permission for a second runway. Indeed there were several instances where SHD appeared to get a little confused about ownership, as will become evident later).

When the financing aspect came back on the agenda later in the session, one of the CMs pointed out that the amount to be funded out of the public purse at Heathrow seemed to be ‘uncertain.’ SHD said this is a matter for negotiation between the government and the airport promoter. He anticipates around GBP5 billion will have to be found from public finances. He admitted there is a bigger construction risk at Heathrow, for example the need for tunnelling in respect of the M25 motorway, but that he did not encounter any ‘insuperable’ problems in his investigations.

The Highways Agency (a government-owned company with responsibility for managing the core road network in England that has since Apr-2015 become ‘Highways England) was not ‘fazed’ by the tunnelling requirement. SHD estimated an approximate 35% risk bias on the GBP5 billion figure.

The forecasting model explained

SHD said the AC had chosen a Department for Transportation forecasting model for its work, to which some amendments had been made. It was not a wholesale new forecasting model, as some had suggested.

Looking at likely future demand in air transport globally in response to a CM, SHD said that while there had been a “kink in demand” associated with the financial crisis and economic recession from 2008 there was a strong upward growth pattern overall. The upward trend in demand for flying has been very strong. Business flying, tourism flying, but particularly visiting friends and relatives had all increased.

Referring to what he described as one of his favourite anecdotes, SHD said that the number of seats between the UK and Poland had risen from 190,000 per annum to six million in ten years. “The Poles like to go home to mum.” (What he did not say but perhaps ought to have, is that the vast majority of those seats are on low cost carriers (LCCs) to and from secondary and regional airports; comparatively few are on airlines at Heathrow.)

One extra runway should have no significant environmental impact

The next question was on the environment, a topic that came up frequently. SHD said there was no sector-based overall environmental forecast but that is the AC’s view the addition of one runway would have no significant impact on the ‘decarbonisation’ of the UK economy. It perceived continuing passenger and freight demand even within the framework of meeting carbon reduction objectives.

SHD referred to the fact that growth at Heathrow was not brought about by additional flights but by bigger aircraft. He said the suppressed demand for slots is very high there, not so much the case at Gatwick. There has been a migration of flights from Gatwick to Heathrow. There will probably be a need for a second runway at Gatwick in the next two decades, but subject to the demands of ‘climate change regulation.’

A HOLEAC CM tackled SHD on surface access to Heathrow, saying more was needed, which was widely agreed (and catered for in the final report).

The discussion then moved on to a topic that subsequently reoccurred, namely the value of the Heathrow project as assessed in cost/benefit terms versus an appraisal in Net Present Value (NPV) terms. Sir Howard argued there was no difference in the Heathrow and Gatwick schemes in NPV terms but several CMs referred to a specific chart on page 147 of the report that seemed to contradict that.

Gatwick’s runway appeared to be GBP15 billion cheaper overall but SHD argued his recommendation was not finely balanced in this respect and that Heathrow offered greater economic benefit. Gatwick appeared to offer fewer benefits albeit at lower costs and that had swung the argument.

SHD went on to say that this is a private project unlike HS2 (the high-speed rail line that will connect London with several major cities in the English Midlands and North); the finance/benefit appraisal is a matter for the airports, so he took a broader view on costs than would apply to the publicly funded HS2.

This Cost/Benefit vs. NPV discussion came back on the agenda later in the session as one CM asked for a more specific answer but after five minutes of further analysis it ran out of steam, with neither side really appearing to get to grips with the contents of page 147.

Passengers paying a congestion premium at Heathrow

A female CM asked if Low Cost Carriers (LCCs) would open up more services from Heathrow, even if their passengers have to pay a premium. SHD said passengers are already paying a premium there owing to congestion. More competition should mean lower fares.

His understanding is that easyJet will compete on a ‘major city pair’ basis at Heathrow once a new runway is open because yield is expected to be higher than at Gatwick. (But of course higher yield usually requires fares to be higher, something of a contradiction of the argument that ‘more competition should mean lower fares.’) Also easyJet should be able to improve its freight business owing to the conglomeration of freight forwarders around Heathrow.

Confusion reigns over airport ownership

A somewhat amusing aspect of the session was that SHD seemed to get confused at times as to who owns what where airports are concerned. He was unsure as to the precise owners of Heathrow Airport Holdings and as to what kind of investors they are.

Similarly with Gatwick, and also Birmingham, which he believed to be entirely in the ownership of ‘an Australian investment fund.’ (It is still marginally majority owned by local councils and the ‘fund’ (a pension fund) is Canadian, the Australian one having exited in 2014).

He was asked why foreign companies dominate airport ownership in the UK but admitted he could not provide an answer. (The answer is that there is hardly a single UK based investor in airports left of any significance). Furthermore he appears under the impression that all UK airports are wholly privatised and owned by foreign entities.

Apart from Birmingham, Newcastle is still majority owned by councils (51%); Manchester Airports Group the same (approximately 65%) while Leeds Bradford is owned by one of the few British based airport investors (and its only airport), Bridgepoint Capital. These of course are only examples.

Sir Howard Davies supports the introduction of a noise levy on top of APD

HOLEAC returned to the subject of the environment and SHD talked about the imposition of a noise levy on top of Air Passenger Duty (which the industry is desperate to get rid of, to the apparent ignorance of the CMs), where there is a lot of noise affecting a lot of people, such as at Heathrow, Luton and Manchester.

SHD said this would be in the order of GBP0.5 per passenger per flight, a trifling figure, but one that would generate around GBP50 million per annum for anti-noise measures. He mentioned that there are specific noise levies around many airports in France.

One CM immediately opined that SHD was advancing a principle that could be taken up by opponents to HS2 but SHD retorted that was not in his brief and therefore did not concern him.

"The options aren’t great" for regional airport substitution

A rather strange period followed in which it appeared that HOLEAC (in common with many others) was under the impression that the AC’s brief was concerned specifically with runway capacity in the southeast of England.

SHD had to point out, as he must have done on many prior occasions, that the brief was somewhat bigger and encompassed the need to retain the UK’s role as a global hub and to improve connectivity. The AC had done a lot of work on whether other (London and regional) airports could be used to offset capacity restrictions in the southeast. “The options aren’t great,” he said, arguing that you cannot tell airlines where to fly.

This statement omitted the fact that the UK has had traffic distribution rules previously (in the early 1990s); something the CMs appeared not to be aware of. Perhaps if they had the discussion might have been more robust. As it was, it fizzled out.

One CM asked if airlines could be ‘incentivised’ to try other airports to which SHD said yes, but it would be expensive and would create less ‘efficiency.’ He then went on to say that new routes can only ‘work’ at a hub airport (such as Heathrow), a rather generalised and bland statement that demanded a greater degree of challenge than it got, and one that overlooked the fact that 70% of passenger traffic at Heathrow is in fact O&D.

Misunderstanding over the different types of regional airport

There then followed another generalised statement from SHD that ignores specific localised needs, namely that “what most (UK) regional airports want are flights to Heathrow.” While acknowledging that Amsterdam Schiphol offers a very real alternative (and has done for decades) with connections from at least 20 UK airports as opposed to just six or seven in the case of Heathrow, he took a rather narrow and parochial view of that airport, dismissing it as not being ‘part of the (British) national image.’

A little research amongst both business and leisure travellers in the UK regions would have told SHD that they don’t care about having to travel via Amsterdam if there is no direct flight, and in any case Schiphol is a single terminal, easy to navigate building (albeit with satellites).

So there is something of a dichotomy between the ‘needs’ of the airports and regional chambers of commerce versus the ‘needs’ of the passengers themselves. There is some, but not a lot, of demand from passengers for Heathrow services in the wider-flung regions where alternatives already exist.

Meanwhile, what the larger UK regional airports (Manchester, Birmingham, Edinburgh, Glasgow, Bristol) want are more direct intercontinental flights, not flights to Heathrow. In some cases, flights to Heathrow are impractical anyway (e.g. Birmingham, Bristol).

Throughout the ACs deliberations there has been a feeling that it did not really ‘get’ this difference between regional airports and their aspirations.

Should it not be left to market forces?

In furtherance of this part of the session, a CM asked SHD if it just wouldn’t have been better to leave airport expansion to ‘market forces’ and to allow each of the three main London airports to add an extra runway each and to compete openly for business. He replied that building in advance of demand in the private sector is rare; where airports are already well positioned in this sense they are invariably run by the state.

He mentioned Amsterdam, Frankfurt (which is partly privatised through an IPO as well as Fraport) and Madrid (where runways were built under government ownership while AENA has recently passed partly into the private sector but the entity is still effectively under the control of the state).

(There was some anticipation at this moment that a CM might have raised a question about the value of re-nationalising the London airports system. After all, the next two biggest are in the public sector, at New York and Tokyo. But the moment passed).

Opponents have been more verbose than supporters

A CM then observed that ‘opponents’ to Heathrow had been considerably noisier than supporters since the AC’s recommendations and that the voices of supporters in areas of the Thames Valley - where there was higher unemployment - had not really been heard. SHD ventured that he had found that the vox populi around Heathrow had largely been in favour of its expansion in his estimation.

A brief technical discussion about surface access to Heathrow by Southern Rail came and went before, in response to a CM question “what took you so long?” SHD made a bold statement to the extent that reaching a decision that is not open to challenge is very difficult but that he had gone out of his way to do so. Also it was a very specific recommendation and not one that could be completed quickly.

The end result had been an ‘oven-ready’ project offering the government the opportunity to ‘hit the ground running.’ The same CM asked if there were any political constraints on his recommendation to which he replied, “not until after the election.”

‘No fourth runway’ is to be enshrined in law

Another CM asked SHD bluntly why he had ruled out a fourth runway and why he had recommended this be enshrined in law. How valid would that law be? Just for the life of the current Parliament?

SHD said operational reasons argue against a fourth runway. NATS (National Air Traffic Services) cannot handle more than 800,000 movements per annum at one airport so that would only permit an extra 60,000 movements from any fourth runway, a figure that would not justify its construction on economic grounds.

It would probably entail the drainage of a reservoir (probably the King George V reservoir or one of the Staines reservoirs, although none was specified) and to some amusement SHD mentioned that no new reservoir had been built since 1945, never mind a runway. No convincing answer was offered as to the validity of the law.

Comment appears to ‘wed’ Heathrow to legacy operations

He (SHD) also asked would it not be better to leave ‘other types of travel’ to other airports. This was possibly the strangest comment made during the session because it seems to wed Heathrow to one ‘type’ of travel; the sort provided by legacy airlines, when it is clear that expansion is supposed to encourage other types. Moreover, one might argue, why not simply do that now as most of the growth remains with the LCC segment that is, in the main, happy with alternatives to Heathrow anyway. (Under such a scenario the need for an additional runway is less evident, the argument put forward by many organisations at the submission stage).

Returning briefly to the environmental theme, SHD said that a further (fourth) runway would in any case not be deliverable in ‘carbon terms’ until 2050 and any runway beyond that until 2070. He said that was a ridiculous timeframe in which he would not engage. By then aircraft might be landing like helicopters or spaceships or something we can’t even imagine. (Realistically, such operational changes could come much earlier).

A CM demanded to know when the government would respond. SHD replied that the government had made clear it was ‘committed’ to an additional runway and that the Transport Secretary would make a statement before the end of 2015. The CM asked if the election for a new Mayor of London should be allowed to intervene but SHD indicated he thought not.

The legality of a night-time flight ban was questioned

A CM asked SHD how he could be sure that the night time flying ban at Heathrow that is part of his recommendation would be binding. He replied that the maximum of 16 aircraft between midnight and 6am was being ‘rigorously enforced.’ The CM insisted that ‘business pressures’ are what matter. SHD acknowledged at this stage that there might be some diversion of flights to other airports as a result of the ban.

He mentioned Frankfurt in particular. Then, adopting a defensive stance for the first time in the session he stated boldly that Heathrow is in a congested area “and has to reflect that fact.” That statement will be like manna from heaven to anti-Heathrow expansion groups like HACAN.

SHD believes that Heathrow is ‘cautious’ about the implications of the ban and wants to examine it in more detail. He said he could only comment from what he read in the newspapers. But in reality it appears to be more than merely cautious.

Fares are expected to fall as competition grows

A CM asked if SHD expected charges to fall. He said no, but he expected fares to fall because of the additional competition even though charges went up in the short term. He reiterated that the scope for more than one operator per route (especially on domestic routes) should bring prices down.

Another CM brought up the subject of slot allocation, which he did not understand. SHD outlined European slot allocation regulations. 50% of newly created slots are reserved for new entrants (but newly created ones are rare at Heathrow of course). There is no formal ‘auction’ procedure but slots are traded between airlines in a grey secondary market and can cost of to GBP20 million each at Heathrow.

SHD has suggested the use of Public Service Obligation (PSO) measures for the stimulation of regional routes. PSOs can only be attached to a new slot. (This suggests there would not be many of them prior to the opening of the third runway).

A CM asked if SHD was saying that airlines would shift their operations from Gatwick and net of external forces.

Further short term service losses are to be expected

The question of what will happen in the short term was raised by another CM. SHD said that some services have already been lost (i.e. not instigated because of lack of slots) but ‘London is well connected’ another argument against expansion from lobbyists). The Heathrow runway is deliverable by 2026 if the government ‘gets on with it.’ Other airports will be full by 2040.

He said some more business would be lost during the next ten years but then added that there is still some spare capacity (at Stansted, Luton, City, Southend and off-peak at Gatwick).

There was no question as to why Northolt Airport had been dismissed as a temporary domestic runway for Heathrow.

Hub/spoke vs. point to point argument persists

A CM then asked SHD probably the most pressing question of the day; how did he see the hub/spoke vs. point-to-point argument?

His answer was that in principle he understands the argument for an increase in longer thinner routes, operated mainly by long haul LCCs and they should be encouraged. But then he made a point that he must have heard at the many conferences that have taken place in the UK on this subject over the last three years, namely that it is mainly legacy airlines that are buying aircraft such as the B787 and A350, rather than low cost airlines.

That is largely correct in Europe (although the reverse is true in Asia). The only purchases of the B787 so far (less than 300 have been delivered out of almost 1100 ordered) – and ignoring lessors - by LCCs/charter operators have been by TUI, Scoot and Norwegian. In the case of the A350 (781 ordered, only six deliveries in 2014/15) it is only AirAsia X.

But that overlooks:

  1. The number of long haul LCCs is growing as the economic determinants of successful operation are re-evaluated. They will acquire new, more fuel efficient aircraft when the case can be made and not before;
  2. Many orders have been placed by legacy airlines that either do, or are in a position to, deploy these aircraft types on what can be described as ‘thin routes’ that do not involve a sizeable hub at either end; for example Icelandair, Finnair, Aer Lingus, Iberia;
  3. Current practice should never be taken to a guide to future practice where aircraft deployment is concerned. Many airports have A380 service now that the aircraft was not designed for.

Sir Howard, clearly not an airline expert, argued peculiarly that long haul LCCs would fail if there was no meal service on them. (Of course there would be, though passengers would have to pay for it, as they do on short haul LCCs.)

The final question came from a CM who asked could attract airlines be attracted away from Heathrow in the same way that Newark Airport has attracted United from J F Kennedy? (The question overlooked the fact that both of those airports are under common management).

SHD said that in his experience alliances had refused to move away from Heathrow (and had threatened to quit the UK if they were ‘forced to’). He admitted that ‘some would say that, wouldn’t they?’

He felt that if infrastructure growth did not come at Heathrow then, for all their posturing, the alliances would probably have to shift. The alliances are only ‘loose’ in their make-up anyway, he argued.

With that statement, which must offer some consolation to Gatwick Airport, the session concluded.

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