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

Supplementary memorandum by the Airport Operators Association (AT 08A)


  I refer to the letter dated 21 December 2001 to my colleague Mr Andrew McCall requesting responses to a number of questions arising from AOA's attendance at the Transport Sub-committee's meeting on 19 December. Our responses to these points are as follows:

    —  A number of regional airports are concerned regarding the maintenance of air service links with London, particularly Heathrow, and are working with their airline partners who operate these services to ensure that these links are maintained. The events of September 11 do not appear to have had any significant impact on this position.

    —  AOA supports moves to resolve the UK US bilateral and to the development of an "open skies" agreement. The implications for regional access to London are not clear and there are differing views amongst AOA member airports on this issue, particularly as regards protection measures such as the "ring fencing" of slots.

    —  AOA does not expect the government to provide assistance on third party terrorism insurance on an indefinite basis. However, as the rationale for this assistance was prompted by a terrorist attack on a Nation State and not against aviation, AOA firmly believes that government support was entirely justified.

    At some stage government will withdraw this support, perhaps when the "war against terrorism" is concluded, or perhaps more realistically, when an open commercial market for this type of insurance is re-established. Once this occurs any increase in overall premiums will be taken into account by both airports, airlines and other service providers in assessing their charges to customers in line with normal commercial practice.

    —  Capacity constraints at busy airports will always have an impact on the ability to accept increased levels of business/activity. The key is to develop capacity where it is required to meet demand and to make the most effective use of existing capacity.

    —  There is no evidence that the effects of 11 September have had any impact on the development of "open skies" but AOA believes that movement in this area could stimulate the depressed transatlantic passenger market (down by around 35 per cent) by encouraging the development of new and competing services.

    —  AOA is not in possession of any knowledge to enable us to comment on this question.

    —  The impact of 11 September has been substantial on a number of airlines and tour operators and their ability to maintain services at the levels immediately before that date. A balanced approach to encouraging new services and preserving services affected by the effects of 11 September needs to be found. Airports generally favour the targeting of exemptions of services where there has been a demonstrable impact as a result of the events of 11 September.

    —  Any reduction in retail activity at airports would reduce the commercial income generated by airports and which is such an important element of the economic mix for our members. Additionally, any reduction in income would have to be considered in the light of increasing charges to customers to offset this loss which would not be in the interests of either the consumer or of the airline (or other customer) that had to bear the offsetting increase in charges.

    It should be noted that there is no evidence to date that it would be necessary to reduce retail space to accommodate additional security measures nor that there is any conflicting pressures between commercial retail and security activities.

    —  The provision, optimum use and development of capacity is a key issue to ensuring the continued success of UK aviation. Without sustainable capacity both in the air and on the ground, UK aviation will not continue to develop nor make its undeniable contribution to the social and economic success of our nation.

    —  AOA would not, as a general principle, accept that airports are non competing entities. We believe that any restructuring within the overall airline sector may bring changes that will impact on airports and which will lead to airports developing competitive strategies to meet the new circumstances.

  The Sub-committee also requested further details as to the additional costs incurred by airports since 11 September. In our written evidence we estimated these additional annual costs to be in excess of £15 million and we can confirm that this represents an average percentage increase of around 20 per cent on baseline security costs.

  We also estimated that additional insurance costs to be in the region of £4 million annually. Latest information indicates that most airports are facing substantial increases in the cost of insurance, instances of premiums doubling are common and we have been advised of an increase as high as 600 per cent.

Keith Jowett

Chief Executive

16 January 2002

Supplementary memorandum by BAA plc (AT 12A)

  As you are aware, I gave evidence to the Transport Sub-committee on 19 December as part of the delegation from the Airport Operators Association. During the hearing, the Committee asked for some additional information which I am now able to provide.

  The Committee asked me how many "bomb alerts" (ie hoaxes) there had been at BAA airports and whether this was an increase on previous years. I can advise you that there were around 70 such alerts at BAA's seven UK airports in 2001 and that was approximately twice the number recorded in 2000. I should point out that this increase is not, in itself, an indication of a higher level of threat.

  I was also asked at the hearing which routes British Airways had ceased to serve from London's Gatwick Airport. BA have stopped flying the following routes from Gatwick since 11 September: Nairobi, Lilongwe, Seychelles, Dar-es-Salaam, Abidjan, JFK, Stockholm, Zurich, Gdansk, Shannon, Cork, Gothenburg, Rotterdam, Montpellier, Lyon, Baltimore, Charlotte, Damman, Milan and Accra. We understand that they plan to stop flying the following additional routes at the start of the Summer 2002 scheduling season: Abuja, Entebbe, Nassau, Grand Cayman, Providenciales and Lagos.

  Your letter of 21 December raised two further points relating to new entrants and slots. Your first point relates to how new carriers might be able to replace BA services at Gatwick. Without touching on the important subject of new runway capacity in the South East, it is in BAA's interest to make the best use of existing runway capacity. Whilst there are relatively few "spare" slots at Gatwick, and only a very limited opportunity to increase hourly runway capacity, BA have recently handed back a number of slots at Gatwick and may well hand back additional slots. BAA can benefit in three ways if these slots are taken up by the "no frills" carriers: firstly, the slots will be used rather than remain unused; secondly, the slots will be used by aircraft with relatively high average loads (see below); thirdly, BAA will benefit if the "no frills" carriers supplement these services with services using available off-peak slots to maximise their aircraft utilisation.

  For the Committee's information, BA's average load on their short-haul services at Gatwick in the year to August 2001 was around 95 passengers. By comparison, easyJet's average load at Gatwick in that period was around 125 passengers.

  The second point you raise in your letter refers to the "use-it-or-lose-it" rule. Normally, under the EU slot regulation, airlines operating less than 80 per cent of services would not be able to claim the same slots in the following equivalent season. Our understanding of the current proposed "exemption" is that if airline services were disrupted at the end of the summer 2001 season as a result of the events of 11 September, airlines will still be able to claim the same slots for the summer 2002 season. Furthermore, if an airline can show that they have had to cancel a large number of their winter 2001-02 season slots as a result of the events of September 11, and can prove the connection with 11 September, they will be able to claim the same slots for the winter 2002-03 season. (There is no suggestion of an exemption from the "use-it-or-lose it" rule for summer 2003 season slots). BAA has argued for a "targeted" exemption from the "use-it-or-lose-it" rule for the current winter season, ie airlines flying services to the USA and some other specified destinations should be able to claim the same slots for the winter 2002-03 season; this recognises the very real impact of 11 September on certain routes, but seeks to prevent the over-protection of slots by carriers undertaking more general re-structuring. Our understanding is that about half of BA's initial hand-back of slots at Gatwick were returned on a permanent basis, with BA indicating that they may seek to reclaim the remaining half under any exemption from the "use-it-or-lose-it" rule.

  Finally, I have reviewed the transcript of the AOA evidence at the 19 December hearing. In Question 155, I am recorded as saying "we do screen all hull baggage anyway and we screen the proportion of hand baggage as required by the Department". In case of any confusion, I should make it clear that all hold and cabin baggage is screened and a proportion of cabin baggage is then additionally hand searched.

  Please do not hesitate to contact me if I can provide any additional information for the Sub-committee in regard to this inquiry.

Mike Toms

Group Planning and Regulatory Affairs Director

8 January 2002

Supplementary memorandum by the Transport and General Workers' Union (AT 21A)



  This is supplementary evidence from the Transport and General Workers' Union in regard to aviation security. Most of our evidence comes as a direct result of a recent meeting of our Civil Air Transport National Committee which specifically considered the issue of security within the industry after the events of 11 September.

  We believe, as a matter of urgency, that an internationally agreed standard for aviation security is introduced in order that the security chain is maintained, and there must be no exceptions for Diplomats, Heads of State, Military and Royalty and their entourage. This standard should include passports, because not all countries have photographs in their passports.

  In view of this we welcome the actions of Civil Aviation Committee of International Transport Workers' Federation (ITF) to develop a Security Policy for the industry, and hope that it will be adopted at the ITF Congress in Vancouver in August 2002.


  We believe that the security of the aviation industry has wider benefits for other industries in the United Kingdom who at the moment do not contribute to the cost of security. The tourist industry is one example and business and commerce is another that benefits from the spillover effects of security. In view of this "market failure" we believe that the security function for the aviation industry should be supplied and undertaken by the state. The cost of security could then be financed by the general taxation system.


  We must approach aviation security as requiring a comprehensive process, involving all aspects of airport and airline operation, not one which gets caught up in a web of contracts and subcontracts. Experience both in the USA and the UK indicates that the quality of people employed in security declines if the function is put out to competitive tendering. Costs must not be a factor in the provision of security. It has been argued, and we agree that profit-making security companies have an incentive to cut pay, training and supervision.

  In the USA pilots, flight attendants, airlines, the entire Senate and a solid majority of the American people have supported the federalising of airport security. Failing this, airports should not be allowed to contract out security work.


  All customers on Transatlantic route should be verbal profiled prior to check in. A sample of people on other routes should also be undertaken.


  We would like to see a single standard that strictly limits hand luggage with exception for families/babies etc. There should be no exception for Business and First Class passenger. Screeners are currently under pressure with too many pieces of hand luggage, and because of that might miss suspicious pieces of luggage. Screening of hand baggage should take place at the last possible point before boarding. Screening for all left luggage and lost property should be undertaken.


  Introduce trained and certified bomb search staff at all international airports. All airports do not have this. This function should be handed over to professionally trained and competent personnel.


  Body checks of all travellers should be introduced eg Berlin Airport, everybody is checked with direct body contact. Checks should be made at the last possible point before boarding. Staff are excluded at the moment from proper checks.


  Panic buttons for staff working in remote areas should be introduced.


  Match all passengers to their bags. No bag must be loaded on a plane without its owner; bags without the passenger it belongs to must be removed. Bags should not be loaded until the passenger turns up. Need to introduce security/safe procedure for unaccompanied bags. The use of barcode guns should be considered.


  Walls between the toilet and adjoining cockpit should be reinforced.

Supplementary memorandum by the Transport and General Workers' Union (AT 21B)



  When giving oral evidence to the select committee on 22 January 2002, we were asked by the chairman to supply a briefing on the situation at Manchester Airport in regard to the security staff. This document is our response to that request.


  This dispute is about reducing the terms and conditions of security staff and other staff at Manchester Airport that were planned well before 11 September. In June 2001 the Manchester Airport announced it was restructuring its business from a single company to a group company with five trading company subsidiaries to focus its activities and reflect its growing role as the second biggest airport group in the UK. The company stated that by forming a group structure and setting up new corporate governance arrangements it would enable the group to take advantage of the enormous growth potential for aviation in the UK and, in particular, for regional airports. In fact, this simply amounted to them establishing two Divisions, with separate managing Directors, so that they could create an internal market. The reason for creating the internal market was to subject the security and other functions to external market forces, with the foreseen consequences of job losses and the reduction of terms and conditions of employment of those remaining as employees of Manchester Airport. It is against this background that the controversial moves have to be seen, and that they are part of a sweeping purge planned by the company to cut costs.

  The owners of Manchester Airport are the 10 Greater Manchester Authorities, and contrary to management claims, much of the company's growth has been through acquisition rather than organic growth. It acquired East Midlands and Bournemouth Airports from National Express in March 2001 in a deal worth £241 million. In June 1999 it acquired Humberside Airport and with the opening of the second runway at Manchester in February 2001, Manchester Airport controls a big stake in UK airport capacity. It's group turnover has risen from £72.8 million in 1986 to £342 million in 2001.


  On 2 October 2000 Manchester Airport announced a restructuring, as part of a refocusing of its activities that it claimed would put customer service, quality and passenger safety at the heart of its business. The changes would result in the Airport making more efficient use of its resources in the highly competitive aviation industry. As part of this refocusing, up to 90 jobs would be lost in its management, operational and administration area, with some functions being combined to achieve efficiencies.

  Our regional secretary David McCall has said that, in the current climate of security consciousness following the 11 September attacks, "you could argue that you should be increasing staff, not reducing them". In our view the real motivation for these moves is to provide a cut-price security service.

  The Company began to implement job cuts on the Information Desks and elsewhere. We had to threaten them with legal action before they eventually consulted properly with us. They also ignored all of their existing "no compulsory redundancy" policies.

  We finally resolved this particular issue simply because there were enough volunteers to avoid a dispute.

  The Company's next step was to announce the establishment of a "new" security company (MAAS Ltd)—simply another wholly owned subsidiary—that would tender for work competitively at the airport. Staff would receive significantly lower pay and conditions than the existing security staff. Unsurprisingly, they "won" the contract to provide security work for Terminal 3.

  We have said it was deplorable that 140 security posts are to be phased out and pay for all other security staff reduced to around £5.50 per hour. In a bid to slash its £17 million annual security budget, staffing levels would be reduced from around 700 to 560 and top-earning security guards offered new contracts that would cut their salaries by more than half. Workers on up to £28,000 per year are being offered voluntary redundancy worth £11,545 to £12,622.

  The company proposed that their working week will be increased from 38 to 42 hours, annual holidays cut by four days, and sick leave entitlement halved. We would simply state that with these rates of pay and some unsociable shifts that will have to be worked, how do they expect to attract and retain people who want to make security their career. However, the company has said that the rate of pay remains higher than private security firms employed at other airports and they would continue to meet all the stringent standards demanded by the government. New recruits will earn the same money as existing employees.

  The proposals caused major internal strife at a time when 1,800 workers, including security guards, were being balloted over a strike in a row over 90 earlier redundancies mainly affecting clerical staff.

  We have consistently warned that the airport had planned to take on a smaller number of new staff on poorer pay than existing security guards, and if implemented this would undermine the morale and efficiency of the workforce and threaten security at the airport.

  The company also claim that the job cuts would allow them to change shift rosters that currently meant extremely wasteful working practices, and there will be no reduction in the number of security staff on duty, and the same stringent security standards will remain in force at all times.

  Customer services director David Teale has also insisted that safety would not be compromised. "What we are talking about is the best and most efficient use of resources." Yet existing customers such as British Airways have said "We are happy with the level of cover provided at the airport . . ." So there would appear to be no pressure from existing customers to change the current situation.

  Meanwhile, government ministers have had meetings with British airport and airline representatives in a bid to address mounting public concern about continuing security lapses at British airports. The Department of Transport, Local Government and the Regions has said that ministers were anxious to ensure there was tighter security before passengers boarded airlines in spite of earlier government claims that measures introduced since 11 September meant that it was safe to fly from British airports.

  "This is an issue we are taking seriously," the department said.

  The ease with which airport security can be breached has been exposed on at least three occasions in recent weeks by journalists with knives and other sharp objects boarding aircraft.

  But the real reason for these proposals have recently been stated in a letter to the staff dated 16 January 2002 from John Donnison, business Manager, Fire and Security Services "the need for the security business at Manchester Airport to become more competitive with external security providers . . . and terms and conditions of employment which far exceed what the competitive market will except. I have explained that if we do not change to become more competitive then the security work, and the jobs that depend on it, will be lost to external security providers.

  The first phase in creating a new security business, within a separate company called Manchester Airport Aviation Services Ltd ("MAASL"), that can resist the competition from external providers is nearing competition. As a result of its terms and conditions of employment, MAASL is competitive [lower] with external security providers against whom we compete for the security at the airport . . . The principle objective is to achieve a competitive security business which meets the requirements of our main client Manchester Airports Division both in terms of service quality and cost".

  From this it is quite clear that it is the airport itself that has induced this competition, by the creation of separate operating companies that then have to tender to its parent company for the contract. The parent company is comparing this bid against other bids and it would be reasonable to assume, accept the lowest bid. This is another example of where tendering can reduce employment conditions in transport companies below an expectable market clearing rate. Also the LEK Report made it quite clear that these cuts did not arise from any financial crisis, but are designed to further increase the Manchester Airports Division still healthy profits.

  David Teale, has also said that the changes were designed to ensure the airport became more competitive so it could attract airlines such as easyJet, which operates out of Liverpool. "We need to get our charges down. If we are more expensive, why should airlines use us?" he said. He claimed wages at Manchester were far higher than at other airports, at present they earn about £22,000 (£28,000 for night shifts).

  It is clear that the company has not learned the lessons from across the Atlantic about reducing labour costs of the security function. As in any other walk of life you get what you pay for. If you want high quality security staff then you have to pay for them. As we said in our evidence to you, ideally we think all airport security staff should be employed by the airport, if not at least directly employ state employees, in part because of the spillover effect. The wages should reflect the skill and responsibility of the job, not the lowest price some firm is prepared to bid for the contract. It is wrong to leave the setting of wages of this group of people to the vagaries and imperfections of an imperfect market.

  Our members have recognised that the Airport may suffer as a consequence of the current difficulties in aviation so they took the position that they would be positive and supportive. They decided they would defer their annual pay rise of 2.5 per cent for up to one year to deal with unknown damaging factors. They also felt that the nine local authorities should accept a similar 2.5 per cent cut in their dividend for the same reason.


  In December last year the Airport was buoyed by the news that passenger numbers nearly topped 20 million (the figures are given below) and the return of services axed after the 11 September attacks.

Passengers% Change vs December 2000
Scheduled International453,791 -4.07
Private/Miscellaneous1,067 -5.32

Scheduled International6,549,032 5.68
Private/Miscellaneous13,269 -2.13


  The position is that the cuts in security jobs that have been proposed mean that 590 workers have been told:

    —  to take a pay cut of 40 per cent or be sacked;

    —  to increase their working week from 38 to 42 hours; and

    —  to reduce their holidays from 27 days to 20 days per year.

  The reasons for these job losses are solely to increase the profitability and do not add value to the provision of the security function at the airport. As a responsible trade union we view the actions taken at Manchester Airport as the worst kind of corporate greed, and that the reduced level of the terms and conditions of security staff will affect the professionalism and quality of people working at the airport and will eventually impact on the travelling public.

Tim Lyle

National Secretary, Civil Air Transport

22 February 2002

Supplementary memorandum by the Department for Transport, Local Government and the Regions (AT 25A)


  1.  Paragraph 37 of the Government's recent Memorandum on the effects of the terrorist attacks of 11 September on the UK air transport industry stated that the Government was considering requests from UK airlines for financial assistance in line with the "de Palacio package" of support measures which the European Commission would regard as compatible with Article 87(2)(b) of the Treaty, which refers to aid "to make good the damage caused by . . . exceptional occurrences".

  2.  The Government has now decided to provide compensation to UK airlines for losses directly attributable to the closure of US airspace following the terrorist attacks, and has issued detailed instructions to UK airlines on how to apply. The Government believes that making payments of this kind will ensure that those UK carriers which are particulary exposed to variations in demand on the North Atlantic market will not be disadvantaged in relation to their European competitors, The Government also considers that those UK airlines affected by the temporary closure of Israeli airspace and London City Airport following the attacks should be compensated for losses directly arising from those closures. The total amount of compensation will not exceed £40 million.

  3.  By drawing the terms of the assistance tightly the UK will be supporting the Commission in its firm stance on state aid, and by taking a lead in Europe be setting a benchmark against which it hopes payments by other States will be judged. In line with the long-standing principle that users should pay the full costs of airline services the Government is not proposing to meet any costs of enhanced security measures. It is conscious that BA and many European carriers have already imposed ticket surcharges to reflect increased insurance and security costs.

Department for Transport, Local Government and the Regions

December 2001

Supplementary memorandum by the Department for Transport, Local Government and the Regions (AT 25B)



Mr Jamieson was asked to respond on "the situation with regard to the cargo market, both your impressions on the consequences of 11 September on the cargo market-place and the consequences of reaching an Open Skies agreement for the cargo industry in this country."

  Freight tonnage through UK airports in 2001 was at lower levels than 2000 before September. For example, it was down almost 12 per cent at BAA airports before 11 September, when it then declined by 27.5 per cent in the latter half of the month. Tonnage had recovered to a decline of 15 per cent in October and since then, published BAA figures have shown a gradual improvement until December when the decline in tonnage was back to pre-September levels. A similar picture is painted by published BA figures and it seems reasonable to assume this is also the overall picture.

  The UK recognises that Open Skies would confer a more valuable benefit on US all-cargo carriers than it would on their UK counterparts, as a result of the UK's geographical position and the scale and nature of the operations of the US all-cargo carriers. The government recognises too that UK all-cargo carriers may find it difficult to compete with the much larger US carriers. Against these points the government must set other considerations. Liberalisation, whether partial liberalisation under Open Skies, or the full liberalisation for which the UK will continue to strive, would bring benefits to UK consumers and to the wider UK economy.


Mr Jamieson stated that the role of government "is to make sure that the security and safety issues are being met and we in the Department have inspectors that go out and check that security is at the levels we want." The Committee asked for more information about the level of security checks in the UK.

  Transec employs 22 aviation security inspectors, whose job it is to monitor the industry's compliance with the UK National Aviation Security Programme. Inspections are carried out at any time when the industry is operational.

  During the period 11 September to 31 December 2001, 309 inspection visits were made to airports and 239 to air cargo agents to check compliance with the regulations. During the course of airport visits, 1,102 airline security functions and 536 airport security functions were inspected. In the corresponding period for the previous year 279 inspection visits to airports and 279 [sic] inspection visits to air cargo agents were made.

  The frequency of visits to particular locations is determined by a number of factors, such as passenger traffic, the results of previous inspection data, the profile of the carriers operating from that airport and the assessed threat against them. Since 11 September we have increased inspection activity at major airports.


(a)  Is the Department monitoring the changes in slot allocation and exemptions granted under the "use it or lose it" waiver at Heathrow and Gatwick? If not, how is the system being policed?

  No, monitoring is undertaken by Airport Co-ordination Limited (ACL), the independent co-ordinator responsible for the allocation of airport slots. ACL monitor the use of slots retrospectively at the end of each season. Airlines which have not used their slots for 80 per cent of the period for which they are allocated will lose their slots in the next equivalent season (under the "use-it-or-lose-it" rule) unless they justify to the satisfaction of ACL that the slots in question should be exempted form the normal working of the rule. We know that at Gatwick BA have returned a number of slots to the pool for re-allocation, and that this has enabled easyJet and a number of other carriers to start some new services.

(b)  When the expected recovery comes, how will the allocation be restructured to take account of those airlines that have expanded their operations during this period?

  Where airlines have cut services because of the post 11 September downturn in demand, they have given back slots to ACL to re-allocate. Some of these slots have been handed back "permanently" and these have been re-allocated to other airlines who will not earn "grandfather rights" to them once they are operated. Other slots have been handed back "temporarily", ie the airline is claiming that its justification for failing to use the slots is a result of the events of 11 September, and ACL have re-allocated these on an "ad hoc" basis. If, at the end of the season, and subject to Commission guidance, ACL is satisfied that they should be exempted from the "use-it-or-lose-it" rule, they will revert in the next equivalent season (Winter 2002-03) back to the original airline user.

(c)  Does the Department accept, and have an explanation for, the fact that while there may be less pressure on slots at Stansted, according to ACL the pressure on slots for Heathrow and Gatwick for Summer 2002 is markedly worse than for Summer 2001, even before any resolution of the UK US bilateral?

  The Department understands that the demand expressed at the November 2001 slot conference for slots at Heathrow for Summer 2002 was buoyant and that the demand for slots at Gatwick was much higher than that expressed in November 2000 for Summer 2001 slots. This may be because knowledge of BA's plans to reduce operations at Gatwick stimulated an unusually high number of opportunistic bids from airlines, particularly from low cost operators.

(d)  Does the Department intend to secure vital regional links to Heathrow and Gatwick from Scotland, Northern Ireland, the West Country and Channel Islands by designating them under Public Service Obligation (PSO) protection?

  The Government understands the importance of regional air links and is currently undertaking a policy review on options available to address the protection of London airport slots for regional air services. The UK has to date interpreted the European Regulation on PSOs tightly, and has only imposed PSOs within Scotland on certain lifeline routes serving the Scottish Highlands and Islands. There are currently no PSOs on routes to London.

(e)  In the context of the UK US bilateral, has the Department given any undertaking to provide slots at London Heathrow to meet the demands of the United States? If so, has the Department formed a view on which routes and services should provide those slots?

  The Department has not given, and does not intend to give, any undertaking to provide slots at London Heathrow to meet the demands of US carriers. It would not be within its powers to do so.

(f)  Press reports suggest that British Airways is considering withdrawing from its regional operations at Glasgow, Birmingham and Manchester. What would be the implications of such retrenchment by British Airways?

  BA's chief executive has described all such reports about its current review of strategy as speculation. If BA were to withdraw from markets where there remains a substantial demand, we would expect other airlines to move in to meet it, just as BMI British Midland increased their services to Belfast when BA withdrew their London-Belfast services.

(g)  Will the long-term investment required by NATS be delayed because airlines are focusing on their own short-term financial needs?

  NATS are reviewing their financial plans, including their capital investment programme, in the light of the events of 11 September. The downturn in traffic has reduced NATS' resources, but has also made some capital projects less urgent than they were. We and the Airline Group, as the two main shareholders, are in close discussion with the company on these matters. David Jamieson said at the hearing on 9 January that the Government would act as a responsible shareholder in contributing to a resolution of NATS' financial position. We are confident that the Airline Group will do so too, whatever the situation of individual companies within the Group.

(h)  How will the events of 11 September effect the timetable for the opening of Swanwick?

  They will not affect the timetable. The decision has been made to proceed with the move of services from West Drayton to Swanwick, and the new centre remains on course to open on 27 January.

(i)  Is this the right time for terminal and runway capacity enhancements to be considered given the current uncertainty of the future size and shape of the air transport market?

  Yes. The Government is committed to providing a framework for the long-term, up to 2030. We do not consider it necessary to amend our long-term air traffic forecasts in the light of the terrorist attacks on 11 September. The Department's published forecasts recognise that demand in the short term may be subject to factors such as wars or terrorist action.

  In considering the need for future infrastructure we are primarily concerned with the size and nature of the end-user markets, rather than the precise structure of the airline industry serving those markets.

(j)  Is runway, terminal and airspace (ATC) capacity the most important deciding factor in the future of the United Kingdom aviation industry?

  Yes, but the structure of international regulation governing aviation and the commercial strategies of the UK's aviation businesses will also have a significant impact.

(k)  Will the historic lack of competition between airports, particularly in the south-east, be diminished as the industry restructures or will it be worse without provision of additional infrastructure?

  The restructuring of the airline industry provides opportunities for airports to compete to attract new and expanding airline customers. However, if in future there was an inadequate amount of infrastructure, the scope for meaningful competition between airports would be greatly reduced.

(l)  Are the SEERAS and RASCO consultations that are essential parts of the new White Paper still on time for March?

  We expect to publish our series of consultations documents, between them covering all parts of the UK, in Spring 2002.

24 January 2002

Supplementary memorandum by Christopher N G Tarry (AT 35A)


  Members of the Committee requested information on the following:

    —  the likely duration of the current downturn and whether the impact will be the same for all carriers and market segments;

    —  the break-even load factors for the principal UK airlines;

    —  the differences between the low-cost and charter carriers, their respective future developments and their impact upon the air travel market;

    —  the key operating statistics for the airlines within each group;

    —  the relative efficiency of the various parts of the airline industry; and

    —  a view on the timing of the proposed change in the charging regime at regulated airports leading to an increase in the airports' charges to airlines.

1.   The likely duration of the current downturn and the nature of its impact by airline and market type

  1.1  Whilst some commentators have sought to draw a parallel with the period following the Gulf War this is of limited use. It is impossible to assess the length of the traffic downturn that has resulted from the attacks on the USA in September 2001 and the subsequent events. However, the following observations may help the Committee in their deliberations.

  1.2  Overall traffic has recovered from its lowest points but remains well down from levels in the corresponding prior periods. For the industry in Europe the latest figures from the Association of European Airlines (AEA) show that in the first week of January, total traffic for their members was some 12.5 per cent lower. Within this figure intra-European traffic was 13.7 per cent lower; North Atlantic 18.0 per cent lower; with Asian traffic 11.9 per cent lower. This compares with the week before Christmas when the corresponding figures were: ¸7.7 per cent; ¸7.0 per cent; ¸12.3 per cent and ¸6.7 per cent respectively.

  1.3  The latest figures for the individual airlines that publish monthly figures relate to December. Generally the figures for this month were better than industry expectations but these too reflect the "Christmas effect" and the continuation of significant discounting. For the final quarter of 2001 the figures show a mixed picture. For most of the mainline airlines traffic remains well down, an exception in Europe is Air France which has benefited, particularly in the African market, from the demise of Sabena and the problems at Swissair and Air Afrique.

  1.4  In the UK regular traffic figures are published only by British Airways, Go-Fly and easyJet although those from the latter airline are produced in a different form. Data for all UK registered airlines is of course available from the CAA but with a publication tag of some three months.

  1.5  Prior to the events of September, BA was already reporting falls in traffic, a consequence of their reductions in capacity, which were having a positive effect on reported passenger yields. The cart shows the experience of British Airways by traffic type since the start of 2000.

  1.6  Against this background there is an expectation that BA's revenue in the October-December 2001 period will be some £500 million lower than in the corresponding quarter in 2000.

  1.7  For easyJet and Go-Fly, their business models are based upon the capacity led growth and in December 2001, Go-Fly's capacity was 19.7 per cent higher than in the corresponding period in 2000. To a greater, rather than lesser extent these airlines, to date have expanded into unserved or underserved markets. They too huse price to generate traffic and whilst reported traffic growth appears unaffected by 11 September and the aftermath their financial figures will show the effect.

SeptemberOctober NovemberDecember
easyJet680,383716,017 690,928670,390
Year-on-year growth27% 33%39%37%
Go-Flyn/a397,314 357,327340,384
Year-on-year growthn/a 76%65%57%
Source: Company reports

  1.8  Looking to the future, whilst it is clear that the airline industry is able to re-stimulate traffic overall it remains well below last year's levels. Further recovery in the near term is likely to be a reflection of market stimulation rather than from any GDP driver. The longer-term issues are the extent to which this in fact will result in a structural change in the pricing environment. A meaningful recovery in business travellers in any cabin is likely to take some considerable time. The recovery will require a more favourable perspective on the economic outlook and even then the widespread relaxation of travel budgets that have been set for 2002.

2.   An analysis of the break-even load factors for the principal UK airlines

  2.1  The break-even load factor is the load factor that is required to equate total traffic revenue with operating costs. As a consequence it not only reflects the volume of traffic that is needed but changes in either the cost or revenue structure also affect it.

  2.2  British Airways publishes its break-even load factor each year in its annual report. The experience of the last five years is shown in Chart 3.

  2.3  In the first two quarters of BA's current financial year we estimate that its breakeven load factor was 62.4 per cent versus 64.9 per cent in Q1 and 62.5 per cent versus 63.6 per cent in Q2. The results for the third quarter are expected to be published on 4 February 2002.

  2.4  Using the standard industry formula the indication is that in their first financial year the break even load factors for both easyJet and Go-Fly were in the low 70s.

3.   The differences between the low-cost and charter carriers, their respective future developments and their impact upon the air travel market

  3.1  The UK airline industry is characterised by three principal segments. The mainline or full-service airlines chiefly: British Airways, bmi British Midland and Virgin Atlantic; the no-frills or low(er) cost airlines chiefly: easyJet, Go-Fly and the Irish registered airline Ryanair; and the charter carriers the majority of which are the airline in a vertically integrated inclusive tour provider offering surplus seats either to other inclusive tour providers or on the open market.

  3.2  It is reasonable to expect little change in the focus of the charter carriers, which in 2000 carried some three times the number of passengers of the UK-registered low-cost sector. They will continue to provide competition for leisure passengers with the low cost airlines to a number of holiday destinations in Southern Europe particularly in Spain. Future capacity growth in this segment is likely to continue to be largely determined by the demands of the tour operators.

  3.3  The low-cost/no-frills segment at this stage in its development is based upon capacity-led growth and this will continue although the focus and location of the capacity deployment will change. Of the airlines, easyJet in particular has a substantial number of orders in place and recent public announcements suggest the acquisition of 45 to 75 more. Within this segment there are differences in the business models pursued by easyJet and Go-Fly and Ryanair. In particular easyJet and Go-Fly are focused on enriching their traffic mix. In the first instance this has been at their respective home bases before rolling the model into new markets to provide either a new service where one did not exist before or to provide an alternative to the incumbent carrier or carriers. For easyJet this has involved setting up bases in mainland Europe. Ryanair's model is based on low cost and low fares serving principally secondary and tertiary airports other than in the UK or Ireland.

  3.4  In the South East of England the moves by easyJet and Go-Fly to build services out of Gatwick suggest that the business traffic catchment areas at Luton and Stansted in terms of supporting new routes may be close to exhaustion. This also reflects a move closer to the principal traffic catchment areas in the region.

  3.5  At the same time Go-Fly is expanding services in the UK regions, most recently stimulating a response from British Midland with its low cost/no frills offering to be launched at East Midlands Airport. For any lower-cost/no frills carrier there is a significant risk if there is direct competition between airlines in this sector. The experience of Go-Fly and Ryanair on the Ireland to Scotland route shows this clearly. A high rate of new route offering with if necessary subsequent withdrawal has in the past ensured the on-going development of new and underserved markets. The moves by easyJet and Go-Fly to Gatwick reflect a different philosophy.

4.   The key operating statistics for the airlines and airline efficiency

  4.1  The key operating statistics of importance are reflected in the relationship between the break-even load factor and the achieved load factor. Examination of the achieved load factor in isolation, however, gives no guide to either the efficiency or the financial performance of an airline.

  4.2  The traditional approach to measuring productivity has significant disadvantages. In this respect the use of measures based on the revenue and cost per flying hour will give a better guide to performance.

  4.3  In any comparison between airlines it is necessary to make adjustments or set the statistics against a meaningful baseline to ensure that comparison is valid. Significant differences can of course also reflect structural constraints. The CAA aircraft utilisation statistics for Q2 2001 show that with an almost identical average sector length the utilisation that British Airways European Operations (Gatwick) achieved from its Boeing 737-300s was 53 per cent of that achieved by easyJet reflecting in large part the Gatwick operating environment.

5.   The prospect of an increase in the regulated airports' charges to airlines

  5.1  It is necessary to balance the needs of the airports to fund expansion over the near/medium term. There is, however, a risk that the increased charges will not result in a commensurate benefit to the airlines even over the medium term. There is an inevitability that when traffic is restored to at least the previous levels, delays, both foreseen and unseen will further mitigate against the efficient operation of airlines at congested airports and result in additional cost being incurred. In this respect the costs of the proposal by the CAA to incentivise BAA to increase annual movements to 480,000 a year[32] at Heathrow would be borne directly by the airlines through additional delays or expanded schedules and a consequent further reduction in efficiency from this cause.

Christopher N G Tarry

18 January 2002

32   Heathrow, Gatwick, Stansted and Manchester Airports' Price Caps 2003-08, CAA Preliminary Proposals-Consultation Paper-November 2001. Back

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