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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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To download “Rethinking the Debate on Aviation Capacity”, a New Statesman special supplement created in association with Gatwick Airport, go to tinyurl.com/aviationcapacity.

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Could technology hold the key to eliminating financial exclusion?

Technology and electronic payments are a lever, providing new ways to bring people into the system and to reduce vulnerable citizens’ reliance on cash.

There is still a long way to go to improve the nation’s financial health.  A key aspect of this is to tackle financial exclusion, and to ensure that every adult is connected in the right way and affordably, to the regular, and therefore regulated financial system. Financial Inclusion is not a party political issue, it is a necessity which makes economic and social policy sense. Where people are financially included individuals, firms, and society as a whole benefit.   

The assumption that financial exclusion is a problem solely in developing economies alone could not be further from the truth. In Western Europe, the population of unbanked and underbanked totals 93 million people. The UK is also ranked ninth in the world in terms of banking inclusion, however two million adults still do not have a bank account. As the UK recovers from the economic crisis, living standards have fallen and inclusion in the financial system remains a major issue. This is despite the fact that the UK leads the world in financial services and technology. Sluggish wage growth, unemployment and macroeconomic uncertainties have placed great pressure on household budgets, exacerbating the fragility of personal finances for many of Britain’s most vulnerable citizens.

While there has been good progress made in the past to address the exclusion problem, the need to realise financial inclusion has never been greater. In March 2015 a report published by the Financial Inclusion Commission, a non-partisan, cross-party group of experts and parliamentarians, identified 20 key recommendations that policy makers could implement to create a financially healthy society. Among them was the recognition of the potential opportunities offered by developments in technology and digital innovation to connect all citizens to the banking system.

Technology and electronic payments are a lever, providing new ways to bring people into the system and to reduce vulnerable citizens’ reliance on cash. Evidence and experience has shown that where cash usage is higher, so is the level of corruption, poverty and exclusion, as well as lower levels of productivity and growth. The Bank of England recently published analysis of cash usage, finding that half of cash in circulation is held overseas or used in the shadow economy. Due to the untraceable nature of this tender, it is not known how much cash is lost to each market.

Promoting cashless economies, supported by technology, has a significant impact on the financial capability of individuals in managing private finances. New technologies enabling bank account holders to distribute their money into jam jars is an example of the role digital innovations are playing in addressing the exclusion issue.  There are already examples of where this is working. In the UK, the diverse London Borough of Brent recognised the opportunity electronic payments present and became UK’s first cashless local authority. Internationally, programmes like SASSA in South Africa and Adahaar in India, are overcoming the challenges of access and identification in disbursing welfare to remote communities, revolutionising the financial capability and access of the welfare recipients.

Yet, underlining all of this is a need for real leadership to drive the financial inclusion agenda. Politicians and industry both have important roles to play in joining-up and supporting the many organisations and individuals already doing good work in this area. Only through this leadership can the UK become a truly financially inclusive society.

Mark Barnett

President, UK and Ireland

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Tackling financial exclusion is a global corporate objective for MasterCard, who provide support for the Financial Inclusion Commission.