Business and finance 19 September 2013 Facing up to the capacity crunch Talk of demand, competition, connectivity and the economic and environmental consequences of air travel dominated a New Statesman-hosted debate on the future of aviation. Sign UpGet the New Statesman's Morning Call email. Sign-up Graham Brady, MP for Altrincham and Sale, and chairman of the Conservative backbench 1922 Committee, is recalling the first time he truly engaged in the airport expansion debate. It was during the final years of the last Labour government when the Conservative opposition shifted its position on a proposed third runway at Heathrow. “I was very concerned that we might be setting back the achievement of capacity which was obviously much needed in the south-east,” Brady said. “I got the then shadow secretary of state [for transport], Theresa Villiers to give an absolute assurance that the fact that we were opposing the third runway at Heathrow did not mean that we were opposed to capacity in the south-east. Theresa gave that assurance very graciously and then spent the next 18 months travelling around the south-east and ruling it out in every constituency where it could happen.” Brady was speaking as the principal guest at a round table debate – “Rethinking the debate on aviation capacity: competition and the passenger” – hosted by the New Statesman earlier this summer. And although we will have to wait until after the next election before we get a final decision on airport expansion, the round table proved timely coming days before the major airports (and those behind new airport projects that are being proposed) presented their detailed recommendations to Sir Howard Davies’s Airports Commission. The commission will present its initial recommendations before the end of this year and will deliver its final recommendations in the summer of 2015. Meeting the need The New Statesman aviation capacity debate covered a lot of ground. Topics included the economic and environmental impact of delivering extra capacity; the benefits of competition; and the arguments for and against a hub airport, a constellation of airports and a variety of other models designed to solve the coming capacity crunch. Indeed there was only one issue which generated near-universal agreement: namely that inaction was not an option. “My principal argument is that after sixty years we really need to get on with something,” Brady told his fellow panellists during his opening remarks. “My principal concern is that we get the capacity. My second concern is that we should do it as soon as soon as is reasonably possible for economic purposes.” For Gatwick chairman Sir Roy McNulty, the argument for extra capacity had been “staringly obvious for the last twenty years and it’s no less obvious today.” McNulty then summarised why he believed that Gatwick’s preferred solution – a constellation of three two-runway airports across London and the south-east – has “significant merit”. “It will deliver airport competition. And competition delivers more passenger choice, better service, lower fares,” he argued. “Of [all] the airport concepts, the constellation is certainly likely to be more resilient to disruption. We’ve seen what happens at Heathrow over and over again [when there is disruption]. And if you put all your eggs in one basket resilience inevitably suffers. And we’re certain that our proposal has less environmental impact than expanding Heathrow . . . finally we believe that our proposition will be affordable. It will be possible to finance it privately rather than from public funds.” Levels of demand Underpinning Gatwick’s proposition and that of its competitor airports is a predicted capacity crunch. According to the Department for Transport forecasts UK passenger number will most likely reach around 480 million passengers a year by 2050 if there are no constraints on capacity. If there are constraints (in other words, no new runways) there will be a shortfall of 35 million passenger spaces by 2050 across the whole country. Moreover, the aviation industry believes the crunch will hit the south-east as early as the mid-2020s. But how trustworthy are these numbers? Ian Kincaid, vice president of economic analysis at InterVISTA Consulting, urged a degree of caution. He noted that there are significant examples where forecasting proved inadequate. “St Louis thought they were going to be a massive airport. [Then] TWA went bust.” But he added: “The absolute level of that demand is uncertain but even on the low side of things, there’s still a need for additional capacity.” The Airports Commission’s stated remit is “to examine the timing and the scale of any requirement for extra capacity” which provides at least some wriggle room for it to conclude that there is no such requirement. Asked if anyone disputed conventional thinking that extra capacity was essential, Simon Calder, travel correspondent of The Independent (and “avid consumer of the aviation services from across the London airports”) offered this: “When Heathrow says, ‘We are 98 or 99 per cent full’ what they mean is ‘of the allowed slots, 98 or 99 per cent of those are full’. What they don’t continue to say is, ‘but if you were to extract the maximum value . . . you could certainly squeeze maybe 10 or 15 per cent more operations in or out.’” “Heathrow isn’t full, Gatwick isn’t full. And overall, south-east England has, when you look at it holistically, too much capacity. And Britain has far too much capacity.” To take that argument to its logical conclusion, does that mean the UK could manage without any new runways? “We will survive for eight to ten years without building any new runways,” said Calder. And beyond that point? “It would be uncomfortable but not unmanageable.” Business impact Unsurprisingly perhaps, that view wasn’t shared around the table. Adam Marshall, director of policy and external affairs, British Chambers of commerce, said the collective opinion of the business community was quite clear. “We think there is a massive constraint on capacity in the south-east,” he said. “Yes there are things we can do in the short term with what we’ve got but these assets need to be expanded.” How short term is the short term? “Well, the short term has been sort of rolling five year cycles for the past forty years, hasn’t it? My big concern is that we’ll go into another one of those five year cycles quite naïvely and not do anything. Unless we all are [actively] in favour of extra capacity, in the south-east in particular, we’re going to end up doing just that, nothing.” Meanwhile, John Dickie, director of strategy and policy at London First urged the government to let the airports get on with expanding. He characterised the approach to aviation capacity as “dirigiste mass central planning” and drew a parallel with retail sector suggesting that it would be absurd if Westfield was prevented from building a shopping centre in Croydon just because it happened to have one in West London. Similarly, letting airports expand at their own cost “is a pretty sensible thing to do”. “Business firmly believes we need better connectivity, growth to grow the economy,” Dickie said. “We are an island nation. London is a great trading city. If you do not have great connectivity, how does that work for you? And that connectivity is going to be principally by air.” Hub vs point-to-point Some believe that connectivity can be delivered only via a hub airport. Both a future Thames Estuary airport, proposed by London Mayor Boris Johnson, and an expanded Heathrow are predicated on this model. It assumes a significant number of passengers are transferring – neither beginning nor ending their journey in London – rather than travelling from point-to-point. Graham Brady, for one, is persuaded by the merits of a UK hub airport. “Increasingly we’re seeing people fly point-to-point – that’s a good thing. Where it’s sensible, sustainable, where it fits with the types of aircraft becoming available and so on,” he acknowledged. “But we’re also seeing people hubbing from UK regional airports to somewhere other than the UK. Whether it’s flying from Manchester to Schiphol or flying from Newcastle to Dubai in order to connect to ongoing flights. So, I’m entirely happy for Gatwick to have a second runway (the sooner the better) but I do think we need a hub airport as well.” It was a point picked up by Shamal Ratnayaka, principal transport planner, aviation, at Transport for London. “In terms of short haul, you’re completely right – there’s a move towards point-to-point traffic,” he said. “But with long haul you see a move in the other direction: a concentration towards fewer, bigger hubs where Amsterdam, Heathrow (albeit imperfectly), Charles de Gaulle and Frankfurt are dominating the market.” In response, McNulty pointed out that London is the largest “origin and destination” market in the world. “It is the best connected city in the world and I don’t think anybody is arguing that we’re the best connected because we had the best hub for the last twenty years. So clearly there’s not a direct link between hub capability and connectivity.” Looking ahead he claimed that between the mid-2020s and 2040, 87 per cent of travel will be origin and destination; 60 plus per cent to Europe, 70 per cent short haul. Part of this is a reflection of current habits and part is the emergence of new aircraft like the Boeing 787 and the A350 which can take passengers point-to-point over very large distances. “We’re in danger of getting fixated on the minority of traffic and not looking at the majority.” Kyran Hanks, strategy and regulation director at Gatwick Airport, added: “If you’d gone with the hub argument ten years ago, you wouldn’t have the most successful British airline based at Gatwick, which is EasyJet. You wouldn’t have the biggest European air line based at Stansted, which is Ryanair.” Economic impact One of the arguments against building a new airport to the east of London is the damage it would do to the west of London. It was a point neatly captured by The Economist earlier this year when it noted in an editorial: “If the purpose of airport expansion is to help lay the foundations for faster economic growth, then sabotaging one of the country’s most successful business clusters is an odd way to go about it.” In response Ratnayaka, who is advising the Mayor of London on airport strategy, said: “Does Heathrow need to close? It needs to reduce in scale. There are advantages in closing it, not least the regeneration potential of that site. But we have to decide, if we need a hub airport, where do we have it? “Munich closed their airport and moved one out. Hong Kong is another example. The French, as always several years ahead of us, opened Paris Charles de Gaulle back in the 1960s and it is now one of the most successful airports in the world. And Charles de Gaulle has the capacity to expand and has the capacity to offer optimised connections in a way that dwarfs Heathrow.” Adam Marshall disputed this reading of events. “I don’t think any of those arguments about other cities reflect the situation we have in London. What we have is an existing, mature airport system. In Hong Kong for example, one airport was closed to make way for another. Talk about capacity constraints, that was a real capacity constraint as you roared over the department blocks.” “The concern I have with the argument that we can suddenly displace all of our aviation activity eastwards is economic geography.” Marshall pointed to overseas companies that had chosen to locate their regional headquarters in the Thames Valley, along the M4 corridor and along the M23 to be near Heathrow and Gatwick. But won’t businesses simply adapt to the new economic geography if a Thames Estuary airport gets the green light? “What a lot of them tell us is that they’ll just go elsewhere, because it’s just too uncertain here,” Marshall said. “They can have their European headquarters just as easily on a massive industrial estate near Schiphol airport [in Amsterdam] which they know is still going to be going to be there and is extremely well connected.” Noise pollution If Boris Johnson is struggling to win over the business community to the advantages of an Estuary airport, then Heathrow is equally struggling to convince those concerned about the environmental impact extra flights will cause. A recent Airports Commission paper sought to express noise pollution – that’s 57 decibels and above across a 16-hour flying day – per passenger flown. By that metric, Stansted serves 12,467 passengers for every local resident affected by noise; Gatwick serves 9,233; and Heathrow 281. “I think noise is the biggest single challenge for Heathrow to overcome,” conceded John Dickie. So is there a viable solution to the problem? “There are ways in which you can manage the noise envelope through technology. There are ways in which you can manage the impact on local people by the way you schedule flights.” Dickie encouraged imaginative thinking” and suggested that by removing a small number of flights that land early in the morning Heathrow could make a huge difference to its noise problem. “One of the things that we’ve argued for in the past is that there should be independent regulation of noise at Heathrow. There should be a cap and an envelope. And the airports and airlines should be required to work within that.” Landing times Roy McNulty accepted that there are a number of technology and scheduling solutions that can alleviate noise, “but in the list of the things you can do, doubling the number of flights is not one of them.” Shamal Ratnayaka insisted the scheduling problem was insurmountable. He said passengers from the key economies the UK is looking to trade with wanted to arrive early in the morning. He pointed to British Airways and Cathay Pacific flights from Hong Kong, many of which arrived at between 4.30am and 6.30am “They don’t do that because that works operationally for them, they do that because that’s where the demand is.” Simon Calder disagreed. “I really don’t think any of us ever wants to arrive at Heathrow at 4.30 in the morning.” Far better, he said, to arrive at 7.00am when more connecting services are available. The pressure [for these earlier times comes from] the departure airports where flights need to take off before midnight.” Turning his thoughts to Gatwick, Ratnayaka argued that the airport lacked the economic incentives it can offer airlines to truly compete with either Heathrow or a new hub airport. McNulty accepted yields were higher at Heathrow which made it more profitable for airlines. “What goes with that are higher fares,” he said before asking rhetorically: “Why do we think that’s a good idea?” McNulty pointed to studies in the United States that showed higher fares were a typical outcome when a city had a dominant airport. The US studies suggested that fares were 10-20 per cent higher when that was the case.” His point was underscored by Ian Kincaid, who advised Gatwick on its submission to the Davies Commission. Kincaid cited extensive research in the United States of large airports dominated by network carriers. This research found that dominant airlines were often able to extract a “hub premium”. Even allowing for a higher proportion of business travellers (who are typically less price conscious than leisure travellers) and other factors, this hub premium varied between 5 and 10 per cent, Kincaid said. For his part, Ratnayaka said that US comparisons should be treated with caution because hubs over there tended to be dominated by one carrier – controlling up to 70 to 80 per cent of the market. By comparison the likes of British Airways were not dominant. “Even after the [acquisition of BMI] BA’s share [at Heathrow] is smaller than Lufthansa’s or Air France’s at their hubs.” Competition Ratnayaka argued that the flaw in Gatwick’s “constellation” model (two runway airports at Heathrow, Stansted and Gatwick), is that it simply replaces Heathrow’s monopoly with “a sort of oligopoly, which is very nice if you’re one of the owners of those three airports but it doesn’t deliver open competition.” “The way to encourage competition is not to have the competition fixed by the infrastructure provider but by those using the infrastructure, the airlines.” Kincaid disagreed, pointing to the how the cost of flights from London to Dublin had fallen dramatically over the last two decades following the entry of Ryanair in to the market, using Stansted and Gatwick. British Airways has since re-entered the Dublin market through its acquisition of BMI, offering very competitive fares. On this route, effective competition is being provided by airlines operating at different London airports. Adam Marshall added: “I don’t understand why there would be a problem having competition around both infrastructure operators on the one hand and airlines on the other. That’s a perfectly reasonable assumption providing the regulatory framework is there so everyone actually has a chance to compete.” The Independent’s Simon Calder said his opening remarks notwithstanding, he wanted more capacity simply because “as a customer I want to see competition flourish.” He added that airports and airlines should “consider a change of model” when addressing the connectivity issue. A straight point-to-point versus conventional hub approach was a limited way to think about the problem, he said. Instead he suggested low-cost, predominantly short haul carriers like EasyJet should consider “interlining” (code sharing) with other carriers. In his closing remarks, Roy McNulty said that one of the strongest lessons to emerge from the debate was “the need to avoid thinking that we can predict the future precisely”. For Graham Brady the two big themes were capacity and competition. “Let’s allow competition and let it flourish for the benefit of passengers and business.” Jargon Buster Aircraft movement Any aircraft taking off or landing at an airport. For airport traffic purposes one arrival and one departure are counted as two movements. Aircraft stands A designated area for aircraft parking. Although the term suggests fixed stands, it is increasingly used as a catch-all to describe a fixed apron, an air bridge or a remote stand. Capacity When an airport reaches capacity it is no longer able to deal with the flow of passengers and cargo without delay and inconvenience. This can be influenced by a number of factors beyond physical capacity such as restrictions on overnight take-off and landing, the number of aircraft movements (see above) allowed within a certain time period and so on. Connection Also known as a transfer; the ability to change from one flight to another on the way to an ultimate destination. The connection could be between two different flights operated by two different airlines, or different flights operated by the same airline. Connectivity Defined by the Airports Commission as the ease with which a potential passenger – whether for business or pleasure – can travel from A to B. Factors that need to be taken into account here are the location of the airport, cost of flights, time of flights and whether the journeys are direct or require a transfer. dB LAeq A measure of noise which refers to the equivalent continuous level. In simple terms it is an attempt to convey an average across a period of time. As applied to the noise around an airport that means across 16 operational hours between 7am and 11pm. A measure of noise dB(A) is a measure of a noise event at the maximum sound level. Hub An airport that has a high volume of flights that allow passengers, who have flown into that airport, to travel on to another destination. Journey Refers to travel from origin airport to destination airport. The journey might be direct (see “point-to-point”) or it might involve a transfer or connection. Origin and destination The origin refers to the airport at the beginning of each leg of a journey and the destination is the endpoint airport of each leg of the journey Passenger With the exception of members of the crew, refers to any person carried or to be carried in an aircraft with the consent of carrier. Point-to-point Where a passenger travels directly to a destination and where the airport is either the starting point or the end point of an air journey. Split hub Sometimes referred to as a “dispersed” hub where the facility of changing planes to complete a journey is provided by two or more airports within close proximity, often within a major city. Transit Passengers who arrive at an airport and leave on the same plane rather than transferring to another service or ending their journey. Transfer Changing from one plane to another en route to the passenger’s ultimate destination. This may involve two different airlines or two different services from the same airline. 2-2-2 Refers to a proposed “constellation” of three two runway airports: Gatwick, Stansted and Heathrow. This New Statesman round table, in association with Gatwick Airport, took place on 10 July 2013 at Portcullis House adjoining the Houses of Parliament. › Five questions answered on the drop in UK retail sales in August Boeing tests its Dreamliner. Photograph: Getty. 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