Memorandum by the Civil Aviation Authority
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 responsibilityeconomic
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
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 Septemberthe 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
cent5 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
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
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
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
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.
VARIATIONS IN THE EXPOSURE OF AIRLINES TO
THE AFTERMATH OF 11 SEPTEMBER
(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
(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
Output: AEA data for European carriers, US Department of
Transportation for US carriers.
PROVISIONAL AIRPORT STATISTICS FOR OCTOBER 2001
|Air transport movements
||% change over October 2000||Terminal passengers
||% change over October 2000|
|Isles of Scilly (Tresco)||236
|Total of above airports||145,568
|Other UK airports|
for which data is available
|Source: CAA Airport Statistics (Provisional).|
Not all UK airports have currently provided October 2001
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)
INQUIRY INTO THE IMPLICATIONS OF THE 11 SEPTEMBER TERRORIST
ATTACKS ON THE AIR TRANSPORT INDUSTRY
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
A listing of AOA member airports is attached at Appendix
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
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
2. KEY 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
2.3 In this submission we will detail the impact of these
factors and submit our views as to how Government should react.
3. AIRPORT SECURITY
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
4.2 Under the terms of the current extension to the Government
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. ECONOMIC ISSUES
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
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
Work towards developing a level playing field
with regard to the funding of airport security costs across EU
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
Take a pro-active stance in the development of
the Single European Sky.
AOA MEMBER AIRPORTS
City of Derry
Highlands & Islands
Isle of Man
Manchester Airport Group
Regional Airports Ltd
Wycombe Air Park
Memorandum by Highlands and Islands
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
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.
2. THE HIGHLANDS
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.
3. THE VITAL
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
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
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
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.
4. DEVELOPMENT ISSUES
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
(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
(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.
|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.
5. THE IMPACT
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
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.
6. THE ROLE
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
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.