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Rethinking the Debate on Aviation Capacity

The capacity conundrum

For Britain to prosper, competition between our airports matters as much as airline rivalry, says Mike Tretheway, aviation economist.

Q. What drives competition in aviation?

A. One of the key drivers is capacity. That’s the capacity provided by airlines and their fleets, how they move them from one use to another, new entrants coming into the market, and so on. But capacity, especially in the UK, also includes the issue of airport capacity and competition between them. And that’s important because, as research we did shows, when airports compete with each other there is a material impact on fares.

Q. Is that competition between airports a characteristic of all big cities?

A. Some cities have only a single airport, so that limits the nature of competition. A good example is Sydney, Australia. The nearest international airport is Melbourne, a ten-hour drive away. Then you have got markets in the United States such as Chicago, which has two airports but they are operated by the same entity.

Q. So is the perfect recipe competition between airlines but also competition between airports?

A. I’d make a subtle distinction here. My recipe for effective competition is: first of all, competition between legacy carriers; second, between legacy and low-cost carriers; and third, competition between airports. And, significantly, ensuring that there is adequate capacity at the airports that are used by low-cost carriers.

Q. Why?

A. Competition between legacy carriers produces only small benefits. So instead of giving you a 3 per cent reduction in prices, low-cost carriers are the ones [that give you a] 12 to 30 per cent reduction. It would be a big mistake to adopt policies that would constrain the growth of the carriers that are driving price competition the most.

Q. What are those policies constraining low-cost carriers?

A. In the case of the south-east of the UK, where we know that all of the airports are going to hit their capacity in the next ten to 20 years, if you add capacity only where full-service carriers compete, that would give you a very minor impact. You are much better off making sure that the growth will be where the low-cost carriers are.

Q. So it’s not simply a case of increasing capacity wherever you can?

A. As an economist I would say the ideal thing would be to increase capacity in all the airports so we have no constraints on any form of competition. But if you can’t do that for environmental or budget reasons you are much better off putting that capacity where the growth is. And the growth in the UK markets in the last 15 years has been only in the low-cost carriers.

Q. But isn’t Heathrow, as London’s hub airport, where the real capacity problem is?

A. What we want is a wide range of destinations where people want to go. That’s not necessarily a distant destination like Wuhan in China, where a small number of business travellers want to go; it may be high-volume to a destination such as Carcassonne in France. We want a wide choice of destinations where people actually want to go in high numbers. And we want the lowest fares there. Viewing Heathrow as the “real” pinch point is naive, in my view. [The Howard Davies-led Airports] Commission is looking at matters not just in the context of ten years, but in terms of the next 20, 30 and 35 years. And in that context, all of the airports in London are pinch points. So if you are going to add only one runway in the next 20 to 30 years, you have to choose it right. You have to choose the one that is going to have the best impact on the connectivity of the United Kingdom and the price travellers pay. Connectivity at high price is of limited value to the UK economy.

Q. But if the new centres of economic growth are in seemingly remote parts of China, shouldn’t that be where we concentrate our efforts?

A. No. China is not poorly served. As you go into additional destinations within China you are really looking at very low passenger volumes. It’s not as if people can’t get to Wuhan from the UK. They can; they just have to make a connection at some point, whether it’s in Shanghai or Dubai. And most people in the UK don’t want to go to Wuhan.

Q. But isn’t there a greater economic benefit in those small numbers of journeys to places further afield?

A. First, the short-haul destinations aren’t confined to leisure. For example, the Silicon Valley of France is Sophia Antipolis, to the west of Nice. Just take a look who’s travelling there. It’s a lot of  business people. Second, it is very important to have direct services short haul, whereas if you are travelling on a flight that’s going to take 14 hours, you are going to use the whole day travelling in any case. So whether it’s non-stop or you’ve got to make a connection for a one-and-a-half-hour flight, that’s a much less important issue than flying [direct] somewhere two or three hours away.

Q. Do you believe that the benefits of hub airports are being oversold?

A. Yes. After you reach a certain scale of connectivity, you get a little bit of additional benefit but it’s fairly marginal. London is the largest single airport market in the world and it is already very well connected. Simply measuring connectivity by the number of cities is not very meaningful. Better to ask: what kinds of volumes go to those cities and what kind of fares do you have to pay for that access?

Dr Mike Tretheway is the chief economist and president of InterVISTAS Consulting. He is currently engaged as an adviser by Gatwick Airport.


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Part II: Is the Government fulfilling its role in the fight against cancer?

In the second in her series of interviews with leading politicians, Larushka Mellor, asks Iain Wright MP, “Is the government fulfilling its role in the fight against cancer?”

The independent cancer taskforce published its 5-year strategy for cancer with a number of recommendations, in July 2015.  What should the government do to ensure the biggest challenges contained within it are attainable?

The scale of the challenge is apparent. I think we should be as bold and ambitious as possible: scientists, clinicians, patients, the general public and politicians all working together for a single goal: to eliminate cancer within a generation, and Britain at the forefront of this.

The taskforce’s recommendations are achievable and the Government needs to act upon them. Patient experience has to be prioritised and this is difficult when NHS cancer services are under unprecedented pressure and the Government far too often provides contradictory messages. The Department of Health must provide the NHS with the resources and the long-term, holistic stability to allow Trusts to invest in state-of-the-art equipment.  The NHS needs to emphasise prevention and early detection too, but the risk is that under greater financial and workforce pressure, cancer services will be forced to firefight.

The Office of Life Sciences, headed up by George Freeman MP was created as the government’s bridge linking science and innovation with the work of the health service. You have recently taken on the role of Chair of the BIS Select Committee, why is the connection between R&D investment, industry, life sciences and the NHS important for fighting cancer?

This is a health and moral agenda, but I think we shouldn’t shy away from it being an economic and industrial one too. Britain is very strong in life sciences: our unique blend of excellent science and research institutions, world class pharmaceutical and med tech companies and the amazing NHS provides us with an unmatched ecosystem to develop the treatments of the future.

I want our country to be able to be supreme in every aspect of the fight against cancer: inventing the technology and drugs to treat it successfully, manufacturing those things here in the UK and giving NHS patients early access to the most innovative and effective treatments. That means maintaining and expanding the science budget, encouraging life sciences companies to locate here, and giving certainty to NHS funding to allow it to invest in more effective treatments for the long term.

The Office of Life Sciences (OLS) is an important part of that institutional architecture. It can provide the long-term certainty to allow treatments to be devised, researched and then brought to market. Research, development and application of treatments for cancer take longer than any single parliament, and the OLS should be able to provide that confidence over several decades. I’m pleased that George Freeman is leading this: his knowledge, experience and passion for life sciences makes him the best possible Minister in this field – if we have to have a Tory Government, at least some comfort can be derived from this.

However, there remain big concerns. The Innovation, Health and Wealth agenda designed to accelerate adoption of new treatments and technology in the NHS, now seems forgotten, and is an example of a long-standing weakness of this Government: a flurry of announcements and initiatives at the expense of successful implementation and delivery. George Freeman needs to tackle this and we on the Select Committee will scrutinise this.   

NICE and NHS England are working on a sustainable solution to the cancer drug fund (CDF) after it is due to end in April 2016; what confidence do you have in the progress they are making towards this and what role can you and your colleagues play to ensure there is continuity of access to oncology medicines after April?

This is a disturbing example of Government failing to provide the coherence and stability needed in this vital field, sending out the message that cancer drugs policy and provision is ad hoc and devoid of any sort of certainty. The recent delisting of several drugs from the CDF reinforces that sense of chaos, incoherence and inconsistency and undermines confidence for life sciences companies, research institutions and – most worryingly – those patients undergoing treatment. This needs to be tackled as quickly as possible to give reassurance. Parliament can obviously play a role in this but I hope we can go further. I want to see us widen provision to improve access to radiotherapy and surgery too.

 Your constituency of Hartlepool has one of the highest incidences of cancer in the country; what do you see as the biggest challenge to improve cancer outcomes over the next few years?

Our high incidence of cancer is both because of our industrial legacy and our lifestyles that increases the risk of developing cancer, particularly smoking. Smoking cessation clinics have been very successful in Hartlepool and this approach needs to continue. I urge the Government to implement policies that would help my constituents and others across the country, such as a one-week cancer test guarantee, improved screening programmes, and better access to and encouragement for people to see their GP.

Iain Wright is the Labour MP for Hartlepool and the Chair of the Business, Innovation and Skills Select Committee.

Larushka Mellor is the Head of Public Affairs and Policy Manager at Merck Serono​.