Start with the passengers

Why competing gateway airports better serve communities
The crux of the debate on airport capacity is whether the south-east should have one mega-hub airport offering the maximum number of connections, or whether the UK will be better served with two or three competing airports. It is my view that competition will provide residents and visitors with better service, greater economic impact and, critically, affordable access. We can learn from many major cities around the world, such as New York, Tokyo and Shanghai. A mega-hub is not a requirement for greatness. Affordable connectivity for residents and visitors is. 
 
Connectivity vs connections
The term connectivity is often heard in this debate, but its meaning is ambiguous. It is important to distinguish between connectivity, the UK’s accesss to the rest of the world, and connections, how an airline group optimises traffic flows across its network. 
 
Connectivity is what drives economic impact and societal interactions. The goal should not merely be about connections to the greatest number of points. Instead it should be about affordable connections and adequate capacity to the right destinations across the world.
 
Affordable connectivity matters
Affordable connectivity to destinations that people want to go to is of much greater importance than having the world’s highest number of destinations. What is the point of an exhaustive list of destinations, if the price for desired destinations is so high and the capacity so limited that only a fraction of potential travellers can actually use the service? 
 
Competition
Competition is the single strongest driver of price. The UK has used competition as its main policy tool for aviation. As an aviation economist, I recognise that the UK has led the world in instilling competition in international air transport. While the US was the first to deregulate domestic markets, the UK led the privatisation of airlines, negotiating the first open skies agreements, privatising airports, and ensuring competition between airports. In a bold policy move, the U.K. in 2009 required the breakup of BAA to ensure that not only would airlines compete with each other but that the airports would as well. Enabling a mega-hub would undermine this pro-competition policy. 
 
Connecting passengers, economic impact and risk
What about passengers that merely connect between flights in London but do not visit the UK? Some emphasise the need to maximise such connections and claim that only a mega-hub can do this. Connecting passengers can add the critical mass needed for viability of a number of routes. However, the economic impact of these connecting passengers is much lower than passengers who want to come to the 
UK. The business risk is higher too. 
 
Some airports with high connecting passenger ratios discovered that such traffic was risky and could move overnight to another hub. St Louis and Pittsburgh were high connecting traffic US airports, but their home carriers either failed or changed strategy. These airports saw their traffic plummet when carriers realigned networks and moved connecting traffic to another hub. Today, as carriers form large carrier groups, management may decide that from a network perspective, certain types of traffic are best connected from a different hub in the group’s network. 
 
Where is the growth?
The contemplated airport capacity increase will not be in place until well into the 2020s. By that time, the carriers 
currently operating at Gatwick and Stansted will have evolved their business models. When we look elsewhere in the world, we see low cost carriers (LCCs) whose business models include not only connections between a single airline’s flights, but also an increasing number 
of connections with other carriers. LCCs in the US, Canada, Australia and Brazil are good examples. 
 
Today many of the most profitable airlines are not the traditional full service network carriers (FSNCs), but the LCCs. This is the case in the U.K. In a recent study I showed that  FSNC traffic in London has fallen from 77 per cent in 1990 to 40 per cent today. Growth is highest at the LCCs. A policy that would only add capacity at the airport used by FSNCs will not support growth for the fastest growing carriers. 
 
London: the world’s largest air market
London is the largest aviation market in the world. Like other major cities, it can support multiple airports. Capacity growth should support competition between airports and carriers. Competing airports will better serve the region through affordable connectivity to where people want to go. 
 
Dr Michael Tretheway is an aviation economist. He is currently engaged as an advisor by Gatwick Airport 
Stansted airport. Photograph: Getty
Getty
Show Hide image

Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation