Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence

Memorandum by the Civil Aviation Authority (AT 07)

  1.  The Sub-Committee is to conduct an inquiry into the implications of the terrorist attacks of 11 September 2001 for the air transport industry, and the responses to those events by the industry, regulators and governments. In particular the Sub-Committee will consider the economic and political implications of the downturn in passenger numbers, security, the role of international subsidies and proposals for Government assistance for the industry, and the effect of the rules of ownership on the United Kingdom air transport industry.

  2.  The CAA is the UK's independent civil aviation regulator, with all civil aviation regulatory functions being integrated within a single specialist body. This Memorandum explains the CAA's perspective on the situation, covering the several areas in which the CAA has responsibility—economic regulation, airspace policy, safety regulation and consumer protection.


  3.  In normal times, developments in air transport broadly reflect, and normally magnify, changes in the overall economy. Given the lag in tailoring airline capacity to underlying demand changes, and despite price adjustments, changes in airline profitability can therefore be strongly geared to changes in the general economy. Over time, as in any other market, adjustments are made to capacity and industry structure to restore typical levels of profit. Government interventions, particularly those aimed at maintaining inefficient capacity during periods of economic downturn, serve only to delay and distort this necessary process of adjustment.


  4.  Before 11 September, economic growth rates in the UK (see Figure 1), the US and other major economies were slowing and airline profits were beginning to weaken (see Figure 2). Figures released by the Association of European Airlines (AEA) for August 2001 indicated a modest 4 per cent market growth in Europe but declines of about 4 per cent across the North Atlantic and on routes to the Far East.


  5.  Figure 1 shows the changed expectations for the UK economy since 11 September—the forecasts for the US are similar but with a somewhat more rapid return to pre-11 September levels. However, it would appear that the Federal Reserve in the US, the Bank of England and the European Central Bank now believe that the global slowdown following 11 September may be deeper and longer than previously anticipated.

  6.  The reduced economic growth rates will have an impact on the demand for air travel. In the short term, however, the more important factor may be concerns about terrorism and armed conflict, and the resultant changed perception of air travel in the minds of potential passengers.

  7.  Air travel demand in the second half of September in the US had slumped by around 35 per cent and IATA's provisional full-year 2001 predictions for US domestic passenger traffic, assuming no escalation in the crisis, range from a 7 per cent-13 per cent fall on 2000's figures, with transatlantic traffic falling by up to 13 per cent under its optimistic scenario. Intra-European passenger numbers are predicted to drop by 1 per cent—5 per cent by end of the year while the total international passenger traffic will suffer a decline by up to 6 per cent.

  8.  This variation of the impact of 11 September across regions means that different airlines have a different exposure which is broadly shown in Table 1.

  9.  The latest figures released by AEA (see Figure 3) indicate that North Atlantic traffic in the seven weeks from 11 September to 28 October was 35 per cent down on the same period last year, while intra-European and Far East/Australasia were down by almost 11 per cent and 17 per cent respectively.

  10.  In terms of airline revenues and profits, passenger volumes only tell part of the story. Just as important is the average yield or price paid. This is heavily dependent, for many airlines, on the proportion of business passengers which they carry, particularly in premium cabins, and so far business travel appears to have been much more heavily affected than leisure travel.

  11.  As the output figure in Table 1 suggest, transatlantic profits are more important for the UK airlines than for US carriers. The Americas route group, the main constituent of which are the services to the US, has provided over a third of BA's total operating revenues and since 1998 has accounted for more than 100 per cent of the airline's overall operating profit. US routes account for nearly 80 per cent of Virgin's scheduled passengers. However, the transatlantic operating division of the US majors in 2000 contributed only 15 per cent of their total output and total profits.


  12.  The airline industry has been substantially economically de-regulated (except on international routes outside the EU). In a de-regulated environment, the industry is set up in a competitively neutral manner, with most airlines unsubsidised and commercialised. It has been a growth industry. In a competitive market, airlines enter (Ryanair, easyJet and GO) and exit the market (Debonair, Gill Airways). New entrants put considerable pressure on any airline with poor products and/or high cost structures.

  13.  However, much of the output of the European airline industry is in markets outside the EU where the bilateral system constrains entry and imposes ownership and control restrictions. These not only affect adversely the markets directly concerned but also inhibit the re-structuring of airlines, thereby impeding adjustment. Reforming this area should be a prime focus of government action worldwide and the UK Government has taken initiatives in this area. It is also desirable that a "level playing field" is maintained internationally in the sense of avoiding further distortions from government intervention, fiscal or regulatory. The EC has played an important role in this recently.

  14.  UK airline responses to date (and those of the infrastructure providers) seem commercially robust, and it is important that nothing reduces the pressure for this adjustment or distracts management attention. In considering any intervention the Government has to be clear about its objectives, and assess fully any proposed options in terms of benefits and costs.


  15.  NATS under the Transport Act 2000, through its licensed subsidiary NATS (En Route) Limited (NERL), continues to be responsible for providing air traffic services to meet the Government's international obligations. The CAA as regulator and licence manager is operating the licence regime in accordance with the Transport Act. The economic slowdown and the September 11 attacks have reduced volumes handled by NATS considerably. We understand that NATS is actively addressing the issues raised as a result of the shocks and increased medium term uncertainty. It is keeping the CAA informed of developments.

  16.  The CAA has agreed to extend from 26 November 2001 to 26 March 2002 the date by which NERL has to submit its first business plan. This is due to the terrorist action of 11 September, which has led NERL to delay the process of consultation with its users as required under the licence.


  17.  The short and medium term outlook for the airports subject to price cap regulation remains highly uncertain. The following factors could affect them:

    —  Lower passenger numbers. These will reduce income from airport charges to airlines and through lower spending on commercial activities.

    —  Increased security requirements. These increase short term operating costs (especially through more stringent bag search requirements) and in the longer term may increase capital costs. Greater time spent by passengers at security also has the potential to reduce commercial revenues.

    —  Airlines unable to pay airport charges. This could occur in the event of serious airline financial difficulties.

    —  A major airline failure. This could have a significant impact in reducing income in the short term.

  18.  The impact is likely to differ between the regulated airports. The impact on Heathrow is likely to be small (beyond the immediate short term) since, as capacity becomes available, carriers are likely to switch Gatwick operations to Heathrow (particularly BA). Stansted is somewhat insulated by its strength in low cost carrier operations. Gatwick may be more significantly affected. Overall BAA's financial position is sound and is likely to remain so. Its current gearing (debt to debt plus equity) is around 20 per cent. Manchester is also adjusting to the changed circumstances.

  19.  The CAA is proceeding with its review of the price caps that will apply at the four designated airports for the five years commencing 1 April 2003. The future outlook is likely to remain uncertain into 2002. There is a real prospect that the final price cap decision will have to be taken in the face of continued uncertainty. The CAA's preliminary proposals released on 2 November provide a framework that is designed to be robust to uncertainty, but it will need to be underpinned by comprehensive scenario-based analysis. The CAA expects to make its required reference to the Competition Commission in February-March 2002.

  20.  Provisional data for UK airports in October (see Table 2) show that the impact has so far been concentrated at London while the regional airports have experienced a growth in flights and a small increase in passengers.


  21.  A number of airspace restrictions were put in place by the CAA at the request of DTLR on 11 September. The restrictions limited flying by aircraft not holding an Air Operators Certificate throughout the UK, closed London City airport and introduced a restriction of flying area over central London. The London City Control Zone airspace was also temporarily designated as controlled airspace on a 24-hour basis. The majority of these restrictions were lifted progressively in the period up to 15 September. In order to maintain a known traffic environment in the vicinity of London City Airport, its Control Zone has subsequently been permanently classified as controlled airspace. Close co-ordination was maintained at all times between the various departments of the CAA, MoD, DTLR and NATS.

  22.  In putting these restrictions in place, the CAA was conscious of the paramount need to protect safety, while taking account of the economic and environmental impact at aerodromes of any such restrictions, and the Government's desire to take positive action. The timely removal of the restrictions was a key factor in maintaining general support from the aviation industry. Additional airspace restrictions have since been put in place around all nuclear industry sites.

  23.  Despite reduced traffic volumes since September 11, there are still certain parts of the air traffic system in the UK where demand exceeds capacity, such as Clacton sector and North Sea sector. In the longer term, it is anticipated that volumes will return to their previously forecast level, and demand will outstrip capacity in a number of areas. Consequently current measures for planned capacity enhancements and operational improvements will continue to be progressed. There will also be continuing pressure from the airline community for direct routeing and fewer air traffic delays in order to reduce fuel burn.


  24.  Throughout the period since 11 September CAA has been actively involved in dealing with the effects for the UK of the terrorist attacks in the US. The CAA has issued a number of requirements to Air Operator's Certificate (AOC) holders to cover revised safety and security procedures. Most notable were instructions to lock the flight deck door (where fitted), the cessation of flight deck visits by passengers and new procedures relating to flight crew leaving the flight deck.

  25.  The CAA has continued to work actively with DTLR and their Security Branch (TRANSEC) and with various other Government departments in evaluating the way ahead for UK operators as regards safety and security issues. The discussions have also included meetings with the US Federal Aviation Administration (FAA), submissions to the European Civil Aviation Conference (ECAC), the EU and the European Joint Aviation Authorities (JAA). At the request of DTLR, the CAA joined, as the UK representative, an ECAC task force on security set up as a result of the events on the 11 September. The task force will continue to meet over the next few months and will report to each member state's Director General of Civil Aviation and also to the EU via the Transport Commissioner.

  26.  The CAA has responded to numerous questions of safety and security, some of which have difficult operational implications. These responses have included meetings with the FAA, JAA, Airbus, UK operators, the ECAC and the EU, mostly in conjunction with the DTLR. There has also been on-going close co-operation with TRANSEC both in ensuring correlation of inputs and responding to specific tasks raised by them.

  27.  Staff have also been heavily involved in security briefings and consideration of emergency design solutions on behalf of the operating industry and TRANSEC. An exemption to the normal design approval process has been granted to enable operators to fit cockpit door security modifications, as quickly as practicable. These measures are in line with those promulgated by the FAA.

  28.  The post-11 September reduction in aviation activity is resulting in industry staff redundancies in significant numbers and the withdrawal of aircraft from service. In response, the CAA has increased the surveillance and monitoring of UK AOC operators and maintenance organisations to counter the potential effects of significant change, heightened security and uncertainty within the industry. In respect of aircraft removed from service, the CAA will agree engineering "care and maintenance" programmes and will assess the implications for the maintenance programmes of the reduced fleet that continues to fly.

  29.  The effects on manufacturing industry have lagged behind the operational downturn in activity, but are now being felt in earnest. There is no immediate impact on the CAA's work, but it is noticeable that there have been delays and cancellations of orders that will eventually have an impact on its certification work.

  30.  There is no evidence of any change in the safety performance of air traffic service (ATS) providers, en-route or at airports within the UK. However, there are indications of some potential changes which will require careful monitoring by the CAA, eg where ATS providers are reviewing projects, manning levels and air traffic control watch configurations. At this stage it is difficult to determine whether or not these changes are directly associated with the downturn in activity.


  31.  The CAA has a particular concern about the potential effects of 11 September on the travel industry, which arises from the CAA's management of the Air Travel Organisers' Licensing ("ATOL") system, the likelihood of more frequent tour operator failures and the urgent need for legislation to provide levy powers for the Air Travel Trust Fund.

  32.  ATOL protects holidaymakers from being stranded or losing money as a result of tour operator failure, and for air holiday protection it meets the UK's obligations under the EU Package Travel Directive. The Air Travel Trust Fund was set up in 1975 as a back-up for the bonds that licensed tour operators have to provide; the CAA had powers to require contributions based on a percentage of the price of holidays. Contributions were made for two years before being suspended, leaving the Fund with only its invested capital. The levy powers later lapsed.

  33.  The Trustees have warned since 1991 that the Fund would eventually be exhausted, and it has been in deficit since 1996. It pays claims using borrowings guaranteed by the Secretary of State: the guarantee is for £21 million (inclusive of interest and costs), and current borrowings are just under £9 million, on which interest of over £0.5 million was paid in the last financial year. The CAA and the Trustees do not regard borrowings as a satisfactory solution, and powers are needed to impose a levy to recoup the costs of the Fund from holidaymakers. This however requires primary legislation, and although both successive Ministers and the industry have been supportive of the objective, Parliamentary time has never been made available.

  34.  The need for legislation has become more acute because of the difficulties facing UK tour operators in the aftermath of 11 September, with the combined impact of loss of consumer confidence and cost increases. The CAA expects an increase in the number of collapses, possibly including those of larger companies: there has already been a reduction in bookings to damage winter cash flow, and of equal concern is the prospect that the market in 2002 may be weakened so that failures happen in the peak months. The problems may be exacerbated by scheduled airline failures which will impact on tour firms and consolidators, and by a shortage of insurance bonding capacity.

  35.  It is not possible to forecast the number or size of failures, but the CAA believes that the Air Travel Trust's facilities, which now effectively amount to less than £10 million, may be insufficient to meet the claims on it. It cannot default because of the UK's EU obligations, and in the absence of any levy powers the Trust will need to obtain Government support for extended borrowings. This would be a matter of serious concern to the travel industry because of the repayment implications, as well as increasing the guarantee cost currently borne by taxpayers. The CAA and the Trustees of the Air Travel Trust therefore believe that urgent consideration should be given to emergency legislation.


  36.  UK aviation makes an important contribution to the national economy. Before the severe impact of the September 11 attacks, the aviation industry directly provided jobs for over 180,000 people in the UK, and contributed around £10.2 billion to the UK GDP (Source: Oxford Economic Forecasting, 1999). The consequences of 11 September have affected airlines worldwide but UK airlines have competed successfully in the past and, all things equal, can do so again. The CAA believes that the industry should be free to adjust, to do so on a "level playing field", and in an environment which enables UK aviation to retain and build on its many strengths.

Table 1


Far East


(3) (4)(5)
Impact (1)¸33%¸26% 6%¸3%¸9% ¸12%

Output (2)
BA38% 7%20%21% 15%100%
Lufthansa30% 8%30%23% 8%100%
Air France24% 18%25%17% 16%100%
KLM31% 13%15%26% 15%100%

68% 13%16%3%100%
United63%13% 5%19% 100%
Delta77%17% 3%3% 100%

  (1)  Impact (measured in revenue passenger kilometres) compares September 2001 traffic with September 2000 traffic.

  (2)  Output (measured in available seat kilometres) proportions based on annual data for 2000.

  (3)  "Other Atlantic" comprises Europe-South/Mid Atlantic routes for European carriers, US-Latin America routes for US carriers.

  (4)  There will be a small proportion of airline output in fifth-freedom markets such as US carriers operating on intra-European routes.

  (5)  "Far East" comprises Europe-Far East routes for European carriers, Pacific routes for US carriers.


  Impact: AEA (Association of European Airlines) statistics for European carriers.

  ATA (Air Transport Association of America) statistics for US carriers.

  Output: AEA data for European carriers, US Department of Transportation for US carriers.

Table 2


Air transport movements % change over October 2000Terminal passengers % change over October 2000

7,298 5220,140¸3
Alderney599¸7 5,459¸7
Barra931 640¸4
Benbecula49-73 785¸73
Birmingham10,1341 705,949¸6
Blackpool658¸44 4,038¸52
Cambridge1503 1,337¸21
Campbeltown864 65610
Edinburgh9,30821 560,57713
Exeter642¸8 34,277¸8
Gatwick21,459¸4 2,529,780¸13
Glasgow8,69411 710,2087
Guernsey3,116¸3 72,922¸6
Heathrow37,891¸4 4,485,442¸20
Humberside1,270¸3 43,757¸3
Inverness7331 22,922¸28
Isles of Scilly (Tresco)236 03,9810
Jersey3,565¸9 120,766¸12
Kirkwall440¸31 4,646¸37
Leeds Bradford2,547 ¸1132,071¸14
Londonderry3870 16,5010
Manchester16,6692 1,766,421¸1
Norwich1,59011 40,515¸1
Prestwick1,18518 116,80122
Shoreham630 720
Southampton2,5134 73,639¸6
Southend20¸13 229¸51
Stansted13,055¸1 1,205,8185
Stornoway40135 8,3256
Sumburgh49830 10,503¸3
Wick2197 1,503¸9
Total of above airports145,568 0.412,900,680¸10
London72,425¸3.3 8,221,269¸14.9
Manchester16,6691.7 1,766,421¸1.2
Other UK airports
for which data is available
56,4743.82,912,990 0.4
Source: CAA Airport Statistics (Provisional).


  Not all UK airports have currently provided October 2001 data.

  The data for those airports which have reported is provisional and may be modified following validation by the CAA.

Memorandum by the Airport Operators Association (AT 08)



  1.1.  This submission is made by the Airport Operators Association (AOA). AOA is the trade body that speaks and acts for British airports and counts among its members all of the nation's international hub and major regional airports together with a large number of airports engaged in business, community and leisure aviation.

  A listing of AOA member airports is attached at Appendix 1.

  1.2   AOA welcomes the short inquiry that the Transport Sub-Committee has decided to undertake into the implications for the air transport industry of the terrorist attacks of 11 September 2001. AOA considers that this timely intervention will facilitate a wider consideration of the key issues affecting British airports in their response to the difficult situations that have followed these attacks.

  1.3  In making this submission, AOA is mindful that individual AOA members may wish to make their own representations to the Sub-Committee and with this in mind this memorandum presents an industry wide perspective and does not deal with individual airport issues.


  2.1  The attacks on New York and Washington on 11 September were heinous acts of barbaric terrorism against a nation State and their impact on the global air transport industry has been widely reported. The use of commercial passenger aircraft as the means by which the terrorists wreaked their devastating attacks created an immediate reaction to and within the global aviation industry. However, the fundamental issue is that the attacks were not against aviation, they were attacks against a nation State. Accordingly, AOA firmly believes that the costs of additional measures introduced in the wake of these attacks should be met by nation States in their planning to counter the possibility of further terrorist action.

  2.2  In the immediate days and weeks following the attacks, the industry has had to cope with a significant drop in consumer confidence in aviation, implement greatly increased security measures, suffer additional costs and react to changes to the aviation landscape with airlines trimming route networks and in some cases ceasing operations completely.

  2.3  In this submission we will detail the impact of these factors and submit our views as to how Government should react.


  3.1  The enhanced security measures introduced at British airports following the attacks were implemented swiftly and effectively. This was a potentially difficult process and much praise for its success must go to the security staff at airports who had to cope with and implement significant changes to operating protocols and procedures whilst, at the same time, maintaining effective relations with the travelling public.

  3.2  The costs of implementing the enhanced measures are generally being met by airports with only a few instances of airports amending their charges to airlines to take account of the increased costs involved. AOA estimates that the additional annual equivalent costs being met by British airports are in excess of £15 million (£1.3 million per month).

  3.3  AOA considers that these additional security costs should be met by Government and in this respect AOA fully supports the position recently taken by the European Commission that the reinforcement of security measures could be borne by Member States. Regrettably, this position was not supported at the EU Transport Council meeting in Luxembourg on 16 October 2001 where a majority of Member States, including the UK, considered that the new security measures should be paid for by users and operators. This decision was directly opposed to that taken by the US government which has reportedly released $3 billion to the American air transport sector to finance the cost of enhanced security.

  3.4  The position of the UK government in this debate has yet to be fully clarified with the Minister for Transport, John Spellar, MP, stating in a Parliamentary Answer on 24 October 2001 that the "question of meeting the cost of security charges is under consideration". AOA would urge an early resolution of this matter and for Government to agree to meet these additional costs in a specific and targeted manner. AOA considers that Government should meet the actual costs of the additional measures implemented by airports, airlines or organisations contracted to provide security services. AOA does not support the proposition that government assistance in meeting the cost of additional security should be channelled through the airlines alone.

  3.5  On a related issue, many airports have seen the introduction of armed police at the direction of local Chief Constables. This presence has been introduced to give reassurance to the travelling public during these troubled times and while there has been no general indication that these measures will lead to airports being charged for this presence there have been isolated suggestions that charges may be raised at some future date. AOA would therefore call on the Government to ensure that no such charges are levied upon airports who have not specifically requested police presence at their locations.


  4.1  Following the attacks, the issue of third party war and terrorism insurance became a major issue for the entire aviation industry. In the immediate days following the attacks insurers initially withdrew this cover and urgent discussions were held with Treasury officials to explore possible solutions. This subsequently led to the creation of a government backed scheme that sought to fill the gap that existed for this type of insurance in the commercial market. This scheme initially operated until 22 October 2001 and was subsequently extended for a further 30 day period to 24 November 2001. The Government is to be commended for this positive intervention.

  4.2  Under the terms of the current extension to the Government backed scheme:

    —  UK airlines must purchase cover of $100 million from the commercial market with additional cover up to the level in place before 11 September 2001 provided by the Government at no cost to the airline;

    —  UK airports and other service providers must purchase cover of $50 million from the commercial market and purchase additional cover under the Government backed scheme up to the level in place prior to 11 September 2001.

  4.3  AOA is grateful to Government for these arrangements but questions why the airlines were given different and apparently preferential treatment over other partners in the air transport sector. The waiving of premiums to airlines for war and terrorism cover over $100 million is clearly discriminatory and no explanation has been received from Government for the reasons why airports and other service providers did not receive equivalent treatment.

  4.4  The additional monthly costs that UK airports have had to meet to provide third party war and terrorism cover since 11 September is estimated at an annual equivalent cost of some £3 to £4 million and the AOA calls on Government to assist in meeting these additional costs and to equal treatment in this regard to that being considered for UK airlines.

  4.5  It is not clear what arrangements will apply once the current government backed scheme expires on 24 November 2001 and whether or not a commercial market for third party war and terrorism insurance will have been established. However, all of the indications are that, whatever exists after that date, additional premium costs will be required and AOA firmly believes that all sectors of the aviation industry must be treated on the same basis, particularly in relation to consideration of their respective positions by Government.

  4.6  Looking to the future, the Sub-Committee may wish to note that AOA is receiving early indications that other classes of airport insurance are likely to increase substantially on renewal as a result of the terrorist attacks. These indications suggest that premiums for airport operator liability insurance and all risks insurance are likely to face significant premium uplifts, perhaps more than doubling.

  4.7  In the absence of government assistance with these additional costs which are a direct result of terrorist activities against a nation State, airports will have no option but to pass on their costs to users of these airports which will ultimately lead to higher costs of travel for air passengers.


  5.1  The events of 11 September 2001 have had a profound impact on the demand for air travel leading initially to massive drops in passenger activity, retrenchment by airlines, significant numbers of job losses and the loss of some well known airline companies. These factors have inevitably impacted on UK airports and our members are reporting a highly uncertain future, at least in the short term. This uncertainty is being demonstrated by the upward pressure on airport costs eg security and insurance; and downward pressure on charges to airlines as these business partners try to mitigate the negative financial impacts on their businesses by seeking reductions in their costs.

  5.2   UK airports fully appreciate that they need to adapt to changes in the market. However, it is also important that such changes are effectively managed and AOA believes that the Government has a clear role in this process by treating all elements of the air transport industry affected by the current situation in a consistent and equitable manner. Indeed, AOA believes that the role of Government should also extend to ensuring a level playing field across Europe in relation to the treatment of increased security and insurance costs as well as to aviation matters generally.

  5.3  The issue of the funding of security costs in particular across European airports must be addressed in the light of the changed circumstances and action must be taken at a pan-European level to bring consistency of application across Member States. Existing differences whereby some Member States fund some or all of the security infrastructure at airports and others, including the UK, that fund nothing, must be reviewed with the objective of agreeing common standards and treatment.

  5.4  The Committee is well aware that the economic health of UK airports is based on the activity levels, typically passengers, aircraft and freight, that these airports facilitate. At the present time, the picture of passenger activity across the UK airports sector is far from consistent but as a generality numbers are down in overall terms. Additionally, and of considerable importance to the industry, the very positive trend in passenger activity pre-11 September has not been sustained following the events of that date with almost every airport showing substantial reductions in expected activity and, as a result, financial performance.

  It is perhaps worth noting that the hardest hit area of activity is in transatlantic traffic with numbers in this area significantly down on 2000. Airports operating in this market have reported reductions in activity in excess of 30 per cent.

  5.5  Reduction in passenger numbers, rationalisation of route networks by airlines leading to reductions in the number of sectors and destinations flown, reductions in charter activity as tour operators seek to limit their exposure to negative trading conditions, airlines seeking to renegotiate their charges with airports and uncertainty as to the future, has led many airports to critically examine their financial positions and implement contingency measures designed to address the changed circumstances. The ability of airports to react at short notice to downturn is limited given the extent of fixed costs related to base infrastructure and regulatory requirements, including security. This means that the impact is on-going unless urgent action is taken. Simple measures such as freezing of planned expenditure, holding recruitment action and deferring capital projects will have impacts both at the airport level but also within their local and regional economies.

  5.6  This level of economic and business uncertainty also extends to planning for 2002 and beyond. Given the uncertainties over airline viability, particularly in the scheduled service market; and reported rationalisation and capacity limitations in the charter market for the forthcoming winter 2001-02 and summer 2002 seasons, airports are naturally extremely concerned over short term trading conditions and it is inevitable that this pessimism will flow through into their future financial plans and budgets.

  5.7  AOA believes that the medium to long term prospects for UK air transport are positive and that growth will return. However, we also believe that the short term prospects are significantly less well signed and that more changes in the air transport landscape are a distinct possibility which could have further negative effects on airports.

  5.8  While airports generally have not had to deal with business interruption due to closure, AOA believes that the Government should look favourably at instances where, as a direct result of the incidents on 11 September airports were forced to cease operations or close. Included in these instances, are the closure of London City Airport from 11 to 15 September following the Government's decision to ban flying over central London and the impact of the government imposed suspension of all general aviation activity for 24 hours on 12 September which affected every airport dealing with this category of aviation. These actions had significant financial impacts for those airports involved and it would not be fair or equitable for airlines to be compensated by the Government for the closure of US airspace without equivalent consideration being given to UK airports affected by similar actions taken by its government. UK airports that suffered loss of business as a result of the closure of US airspace should also be compensated.

  5.9  Whilst these are undoubtedly difficult times for everyone involved in aviation, there are also opportunities for progress by resolving matters that would help aviation overcome the current problems. Whilst these issues probably extend beyond the scope of this inquiry, AOA would strongly urge government action to resolve the current stalemate on UK/US air service agreements working towards an "open skies" agreement and to make progress with our European partners on the development of a Single European Sky. In our view, progress on these matters could significantly assist the recovery of aviation and air transport and underpin the long term development of this essential economic sector.


  6.1  UK airports have responded swiftly and positively to the challenges posed by the events of September 11. Our first priority has been to implement necessary enhanced security measures and we fully recognise our responsibility to allay the fears of the travelling public. However, in these exceptional circumstances, the Government must also acknowledge its responsibility to intervene in a targeted and equitable way to assist the aviation industry through this difficult period.

  6.2  AOA calls upon the Government to offer real and practical assistance to UK airports in this difficult time. Specifically, we would wish to see the Government:

    —  Assist in meeting the additional security and insurance costs incurred by UK airports following the events of 11 September;

    —  Work towards developing a level playing field with regard to the funding of airport security costs across EU Member States;

    —  Compensate airports directly affected by the closure of US and UK airspace in the days following the terrorist attacks;

    —  Compensate airports for the loss of business as a result of the decision to suspend all general aviation activity on 12 September;

    —  Assist the recovery of the aviation industry by working to resolve the current stalemate on UK/US air service agreements;

    —  Take a pro-active stance in the development of the Single European Sky.

November 2001



  BAA plc








  Belfast City

  Birmingham International


  Bristol Filton

  Bristol International



  Chester Hawarden

  Chichester Goodwood

  City of Derry








  Glasgow Prestwick



  Highlands & Islands











  Isle of Man


  Leeds Bradford


  London Battersea

  London City

  London Manston


  Manchester Airport Group



    East Midlands


  Manchester Barton


  North Denes





  Regional Airports Ltd

    London Biggin Hill

    London Southend

  Retford (Gamston)

  Sheffield City




  TBI plc

    Belfast International


    London Luton




  Wycombe Air Park

Memorandum by Highlands and Islands Enterprise (AT09)


  Highlands and Islands Enterprise (HIE) is a government-sponsored development agency. It has both an economic and social development remit and works through a core central office in Inverness and through 10 Local Enterprise Companies (LECs) which are geographically distributed throughout the Scottish Highlands and Islands. The HIE network has three key strategic objectives which it seeks to achieve through working with businesses, communities and the third sector: Strengthening Communities; Growing Businesses; and Developing Skills.

  HIE is not a transport provider nor, unlike Scottish local authorities, is it a statutory transport authority. HIE's interest in transport is at a strategic level. It works in partnership with Scottish Executive, local authorities and transport operators to devise, promote and assist in improvements to the region's internal transport network and in improving our connections with centres outside the Highlands and Islands.


  The Highlands and Islands have special transport needs. The area's topography is characterised by mountains, a deeply indented coastline, some 90 inhabited islands and an extremely low population density (around 10 persons per square kilometre, compared with the Scottish average of 65). In fact, the Highlands and Islands is the only UK region with a network of internal air and ferry services. Per capita, mileages of road and railway are high but public transport is sparse.

  The area of the Highlands and Islands stretches for over 640 kilometres from Shetland in the north, to Campbeltown at the southern tip of Argyll. It has a small but growing population of currently some 432,000; that is around 0.8 per cent that of the UK. There is only one sizeable urban settlement, Inverness, which, in contrast to the rural hinterland, is evolving as a regional city of major Scottish strategic significance. The Inverness metropolitan area has seen its population double since the 1960s to around 60,000 today. Notwithstanding its extreme geography the region makes a substantial contribution to the wealth of the nation, eg £1 billion worth of exports (excluding oil). Although the region's total population is beginning to increase, in contrast to former trends, its scale means that our economy will always be reliant on trading and commercial links with other parts of the UK and the rest of the world. This includes tourism which accounts for over one in six jobs within our region's economy; that is, significantly above the Scottish and UK averages.

  The area's problems of peripherality, fragile economic base and low GDP were recognised by the European Community which accorded the Highlands and Islands of Scotland the highest level of status, Objective 1, for access to EC Structural Funds from 1 January 1994. This aid has enabled the region to improve its GDP and economic position such that regional aid is now tapering down. Between 1994-2006 it is anticipated that approximately £460 million of European Programme monies will have been invested in the region, primarily in support to businesses and physical infrastructure. This investment will only be fully rewarded if businesses, residents and tourists have access to high-quality transport services of which air transport is a vital component.


  For the Highlands and Islands as a whole, good air transport links are important for the smooth, efficient conduct of business and public administration; attracting inward investment; developing inbound tourism; speedy delivery of mail, newspapers and urgent freight; and improving quality of life by facilitating social, family and leisure travel and access to health facilities and services.

  There is a range of air services within the Highlands and Islands. These can be grouped into three broad categories. First, local services which are the inter-island services within each of three local authority island areas of Eilean Siar, Orkney and Shetland. These serve business traffic and social and leisure trips by residents of some of the remotest parts of the United Kingdom.

  Second, inter-regional services linking main centres within the Highlands and Islands, encompassing mainly flights from Stornoway, Orkney and Shetland to Inverness. These allow business and leisure trips to be made and add to the overall cohesiveness of what is a large and diverse region.

  Third, flights between airports in our region and key centres elsewhere. These include links with Aberdeen, Edinburgh, Glasgow and also London (Gatwick, Luton and London City). These provide opportunities for not only point-to-point traffic but also for onward connections with a wide range of destinations. There are presently no direct scheduled international services from our area, with London being the only non-Scottish city linked by direct services.

  The airfields in the region are almost wholly public-sector owned and operated, by both Scottish Executive (the 10 major airports in the Highlands and Islands) and local authorities (predominantly smaller airfields in Orkney and Shetland).

  The Highlands and Islands are particularly dependent upon air travel given: the distances to be travelled within our region; distances to key centres outside the Highlands and Islands; and the wide and sparse distribution of our population. This reflects the fact that the surface travel times within the area are very large. For example, travel from Shetland to Inverness by surface requires a 12 hour ferry crossing to Aberdeen (at a sailing frequency of one return trip per day) and then a journey of around three hours by road or rail.

  The same conditions apply to travel to destinations outside the Highlands and Islands. For example, Inverness is connected to London by one daylight passenger train and one overnight sleeper train daily. The journey time is approximately eight hours. By road Inverness is 570 miles and about nine hours driving time distant from London. Inverness is in fact as far from London as the Swiss capital Bern and further than the capitals of France, Germany, Netherlands, Belgium and Luxembourg. Therefore, access by surface transport is not a realistic option for business or high quality tourism travel.


  HIE are working with its partners to address a number of issues which will help us to increase the economic and social contribution of air services. Some of the key development issues are outlined below.

(a)   Securing Access to Global Connections

  Our region is linked in the main to the world-wide air network via the service between Inverness and London Gatwick. Inverness has twice daily flights to Edinburgh and Glasgow from which a very limited number of international services are available. These connections, while useful, link with a small fraction of the destinations demanded by Highland business. There are no links between Inverness and other hubs such as Amsterdam or Manchester. Most of the Highlands is therefore, totally reliant on most world access through Gatwick.

  Its importance in maintaining regional connectivity is demonstrated by the fact that 50 per cent of those using the service are interlining over London, with transcontinental connections being particularly significant. For inward investing businesses with international markets, and high quality international tourism on which the economy of Highlands and Islands depends, good air links to a hub with comprehensive interlining capability are essential. This service is vitally important to the Highlands as a whole: over half of the trips have an origin/destination in the region outside the immediate Inverness area.

  The sudden withdrawal by British Airways of the Inverness-Heathrow link and its replacement in autumn 1997 by a British Regional Airlines service to Gatwick with its inferior interlining possibilities caused much concern in the Highlands and Islands. This shift resulted in a 20 per cent drop in patronage. In the absence of immediate prospects of access to Heathrow, Gatwick offers the next best and only realistic alternative opportunity for interlining access to the world.

  There is concern that a similar situation could arise with regard to the present Gatwick service and the present operator could withdraw the service and make use of the slots for a more lucrative route. HIE, The Highland Council, Inverness Chamber of Commerce and Scottish Council for Development and Industry have sought support for the concept of "ring fencing" slots at London Gatwick for the Inverness service through a Public Service Obligation (PSO). The aim is to bring certainty to the present position and give users and potential users of the service the confidence that it will continue to operate to Gatwick at a reasonable level of frequency (presently three return flights per day). PSOs are used extensively in other parts of Europe such as France and Spain, to guarantee air links between remote areas and main hub airports.

(b)   Restoring The Inverness-Amsterdam Link

  In the last decade two separate operators (Air UK and ScotAirways) have commenced a service between Inverness and Schipol. However, neither were sustained. In the case of the most recent effort, the service commenced in early September 2001 but was suspended shortly after the events of September 11, despite the active support of the HIE network. We are keen to see the service restored in order to offer direct international access to the region from a major airport.

(c)   Developing New Cross-Border Services

  HIE are promoting the development of new direct air services with other parts of the United Kingdom. Research indicates that there are opportunities to develop services to Manchester in particular, but also to Birmingham and Bristol. These would improve our connectivity with other parts of the country by facilitating business and tourism links. They would also offer other international connections beyond those presently available via Gatwick.

(d)   Creating New Island Routes

  Given the nature of our region's geography we are promoting the introduction of new routes out of some of our smaller airports. This could encompass links outwith our area: for example, between Broadford (Skye) and Edinburgh.

  Thin traffic on more local routes limits the scope for low fares, sophisticated aircraft and the development of new services, but some possibilities are being examined. Indeed, in some instances air travel can be more cost effective than providing infrequent ferry services where capacity utilisation can be particularly low in the winter months. Possibilities being researched including linking some of the west coast islands with the service centre of Oban and providing greater internal air service provision within Orkney.

(e)   Making the Most of Our Airport Infrastructure

  In recent years there has been significant investment in some of our airports, including new terminal buildings at each of Inverness, Kirkwall and Stornoway and the introduction of ILS. It is important that the wider social and economic returns from this investment are maximised. This requires that:

    —  opening times are sufficiently extensive to account for the needs of both the passenger and the freight markets;

    —  the charging regimes do not act as a deterrent to new air services or the extension of existing ones;

    —  airports, while generally subsidised by the public sector, operate efficiently and seek to exploit opportunities for additional custom;

    —  particularly at smaller airfields, traffic and other regulations are applied sensibly and airports are "fit for purpose".

(f)   The High Cost of Air Travel

  A major issue for our region is the cost of air travel. Of all transport modes, air services have seen the most limited development in our area within the last decade and certainly compared with the growth in air services elsewhere in the United Kingdom. Generally, there has been very little growth in air passenger numbers within the last decade. We believe that the level of fares is one of the main factors inhibiting growth in air traffic and services in the Highlands and Islands. High fares have been exacerbated by the effects of the airport passenger tax which is especially severe in the case of short Highlands and Islands sectors.

  Some examples are given in the Table below.
Return Economy Fares (£)

RouteLowest Highest
Inverness-London Gatwick153.90 378.90
Shetland-Inverness287.20 287.20
Inverness-Glasgow187.20 187.20
Stornoway-London328.40 532.40
Kirkwall-Edinburgh276.70 346.70
Source: British Airways. Fares are as at November 2001 and are inclusive of taxes.

  Despite our location and geography, there remains a tendency among some outside the region to view air travel as a "luxury" to be restricted to a top tier of essentially business traffic which can afford the very high fare levels.

  This is despite the growth in air travel elsewhere in the country which has been fuelled by the "low cost revolution" led by airlines such as Ryanair and EasyJet. Despite HIE's efforts to promote and support such services this revolution has largely passed the Highlands and Islands by. At present, the only low cost service in our area is a one return per day service between Inverness and London Luton. While this service is welcome and is also well-patronised it is of a much lower frequency than similar services to lowland Scottish airports.


  The tragic events of September 11 have deeply affected the airline industry. Despite our region's peripherality, they have significant implications for air services within the Highlands and Islands. While these have yet to become fully evident in terms of scale we see the main potential impacts as being:

 (a)   Increased volatility and uncertainty

  Given the financial losses and cuts in capacity being made by many major airlines, there is little certainty regarding the continuity of many routes. In a market context of limited volumes our services are unlikely to be a major priority for most airlines and particularly so for those between Inverness and London. We are concerned that routes may be abandoned at very short notice, similar to British Airways' cessation of its London-Belfast service.

 (b)   Downturn in passenger demand

  The timing of recent events means that any downturn in tourism traffic stemming from September 11 will not materialise until the second quarter of 2002. However, a decrease in visitor numbers may threaten the viability of particular air services and, again, particularly those operating between London and Inverness. It should be appreciated that the air network in the Highlands and Islands was still requiring significant improvement during the prolonged period of economic growth between 1992 and 2001. Clearly, we are concerned as to the robustness and viability of parts of the network should there be any prolonged period of economic recession.

  Significantly, the events also had the immediate effect of the suspension of the Inverness-Amsterdam service and the loss of the potentially significant benefits that this service would offer. There is a danger that airlines will begin to perceive that the Highlands and Islands is a "difficult" market and this perception could spread to domestic routes where independent research clearly indicates potential (such as Inverness-Manchester).

 (c)   Increased Operating Costs.

  Security and insurance costs will increase as a result of the events of September 11. The scale of cost increases are not entirely clear at present. However, they will, in the most part, be passed on to air passengers, in a context where APD already applies to some routes and where, as shown above, fares are already very expensive. The result will be that the cost of air travel will rise and growth in demand and thus in route development will be constrained.

  Any such increases will disproportionately affect two types of route. First, local inter-island services where fares are relatively low due to the shortness of sector. Second, in significantly increasing (in proportionate terms) fares on low cost airlines, the development of which are already very limited in the Highlands and Islands due to our low population levels.


  As can be seen from the foregoing text, HIE has a clear view of what is required for an air service which will support our wider efforts to improved social and economic conditions in our region. HIE continues to support the development of the air network by: promoting new ideas and concepts around air services; working in partnership with transport authorities and providers; and, in some instances, providing direct financial assistance with infrastructure investments and marketing.

  However, in order to support our own efforts, there are a number of actions required of central government to ensure that the Highlands and Islands suffers no strongly detrimental effects post-September 11. We appreciate that some of these may relate more to actions for the Scottish Executive than of the UK government: we believe, however, that they should all be reflected in the UK-level Aviation White Paper that will be produced in 2002.

  Securing slots for the Inverness-London Gatwick air service. The case for a PSO for this service has been accepted by Scottish Executive ministers and it is presently being discussed with officials from DTLR. The designation of the PSO by DTLR would significantly increase confidence in the tourism and business sectors throughout our region. In tandem, we would strongly urge that the Government opposes any changes in EC slot allocation regulations that would lead to a fully open tradable market in slots. This would remove possibilities for securing definite regional air service access to major hubs such as Gatwick.

  Air Fare Levels. As noted earlier, increases in security and insurance costs will be passed on to travellers. Given the context of high fares and air dependency within our region, we believe that the Government should review the current application and levels of APD with a view to their reduction with regards to travel to/from the Highlands and Islands. Further, any future consideration of levels of duty on aviation fuel should include consideration of the harmful effects this would have on travel and social and economic activity within our area. It should also reflect the fact that the effects of air traffic on the Highlands and Islands' environment will be negligible even in the longer term.

  HIE are presently involved in research into the possible application of PSOs to some internal routes within Scotland. This is with a view to ensuring that fares and frequency of service are appropriate to the development needs of our region. When this research is complete, we will be looking to move this forward along with other ideas for reducing fare levels. Therefore, we would seek recognition in the forthcoming White Paper that air travel is not a luxury in the Highlands and Islands context and that fare levels, in particular, should reflect this reality.

  Airport operations. The Government should ensure, through an independent review drawing on comparison with similar European countries, that the policies of CAA are not over-engineered for the Highlands and Islands context, with our generally small airfields and low passenger throughputs. Artificially high operating costs for our airports will lead to higher fares. They will also act as a deterrent to the development of new air services. Third, they will limit the opening hours of our airports and thus harm the potential for route development and particularly so with regard to air freight.

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