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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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Is the Government fulfilling its role in the fight against cancer? A patient’s perspective.

Larushka Mellor, Head of Public Affairs and Policy at Merck asked Mark Flannagan, Chief Executive at Beating Bowel Cancer for his thoughts.

After much anticipation and delay, NHS England and the National Institute for Health and Care Excellence (NICE) have set out how they will tackle the thorny issue of getting more of the latest innovative life-extending drugs to advanced cancer patients quicker.  This is their response to help the Government manage the financial pressures facing the NHS by securing better value for money from cancer treatment whilst maintaining a manifesto commitment to thousands of patients with advanced cancer that they will be able to get the best treatment for their disease, now and in the future.

The Cancer Drugs Fund (CDF) was only intended to be a ‘sticking plaster’ whilst government reviewed the process by which we assess innovative cancer treatments. It is clear that the financial management of the CDF has been less than perfect, but there is no doubt it has provided the only route for patients to receive internationally recognised standards of care, at a time when NICE didn’t recommend funding for the majority of cancer drugs it assessed over the last decade. Cancer is a devastating disease especially when it is advanced and patients are told it is terminal.  The CDF allows treatments that can keep patients who are facing death the opportunity to live a few extra months, giving them a better quality of life and extra precious time with family and friends.  What price do we put on this extra time?

The reforms outlined are long overdue.  The big question for thousands of cancer patients at the heart of these new reforms is “Will I be able to get the same treatment in future that patients get now, or will it be worse?”

The reality is that many bowel cancer clinicians are worried that we are about to take a step backward in providing the accepted standard of treatment they need based on what we know works.

For all but the most determined opponents, it is clear that we are currently providing new cancer drugs based on what a patient wants and with a clinician deciding when a few more precious months of life is worth the cost.  However, the NICE model that has initially rejected these drugs for funding is no longer a credible mechanism to determine access to cancer drugs, especially end of life drugs.  How it appraises these treatments is lagging a decade behind innovation.  We are at risk of moving backwards in the way we treat cancer with effective drugs disappearing forever. We have an analogue approach in a digital age.

Now we must build on the benefits of the CDF with a better, fairer approach. 

The over inflated price of just a few drugs has dominated news headlines of late.  Whilst I don’t defend the high price of a small number of new drugs, this focus is at the expense of established, cheaper treatments of proven worth.  There are only a few treatments options left for advanced bowel cancer, some of which have been the standard of care for ten years or more.  Nothing has changed in terms of their clinical effectiveness, but it is the way we decide whether they are still affordable that is the problem.

Health charities like the one I lead have been at the forefront of both highlighting the real-life benefits of access to new drugs and advocating for a new approach based on the real value of drugs to all patients.  We need to hold pharmaceutical companies’ feet to the flame.  If they believe in the value of their drugs then let’s seriously consider paying them by results.  Companies could be asked to wait for the reimbursement until their drugs have been shown to work.

We have been deeply frustrated therefore when attempts to define how to assess that value have run into the ground time and time again.   Something has to change.  Recently bowel cancer doctors came together to warn of a return to the “dark ages” of cancer treatment.  We cannot go back to a time of the original “postcode lottery” when patients in England were denied medicines that are routinely available in other parts of the UK and Europe.

It is time for politicians, ultimately the Prime Minister, to take charge.   There is an assumption in some quarters that the evidence for denying these drugs is sound, fair and scientific.  The reality is that we are on the brink of patients diagnosed with advanced bowel cancer in 2016 receiving worse treatment than those diagnosed in 2015.  As they stand these proposals will erode the very welcome progress made due in recent years.

There is a huge prize here.  Ultimately, we can be a centre of innovation in cancer treatments; leading the world in delivering new drugs faster to patients, with a robust, up-to-date system for assessing the value of these drugs. We should not return to a time when doctors had to tell patients their options have run out.

Mark Flannagan, Chief Executive, Beating Bowel Cancer