Select Committee on Transport Fourth Report


4 Challenges

Competition

The need for competition

48. Both BAA and the trade unions asserted that common ownership of the London airports is a necessary condition of effective investment.[53] We disagree, and set out our reasons for doing so below. We believe a competitive airports sector would be better than the current state of affairs, where in our opinion competition is stifled by common ownership of several major airports. Airports under separate ownership would have to compete for traffic. This would also have positive consequences for passengers. BAA's common ownership is holding back the natural development of the market, where discrete passenger markets are less well-defined.

Potential competition

49. It is important to stress that competition in the airports sector is subject to several major limiting factors. When a competitive airports sector is referred to, it should be qualified by an awareness of these limitations. The problem is one of supply and demand. The demand for air transport is not evenly spread, or even all of the same type. There is more demand for capacity in the South East of England, and that demand can be split in several ways, short vs. long haul and business vs. leisure being the two most obvious. The problem with supply is also complicated in that different airports can also be categorised as (predominantly) serving different modes of transport. 'Hub-and-spoke' model works with large airports through which flights are directed, even if that airport is not the final destination. Over one third of Heathrow's traffic is 'hub-and-spoke', and it is thus referred to as a hub airport. In 'point-to-point' flying, the passenger boards a plane and flies directly to his final destination, which might be a large hub airport or a smaller regional airport. While it is possible to build a small airport capable of flying a modest number of point-to-point flights with relative ease, the current economic demand is for an extension of Heathrow's hub-and-spoke operation. The economic case for expansion at Heathrow is considered in Chapter 5.

50. In terms of supply, the problem is one of capacity. From the roads around the airport to the airspace above it, there is little room for expansion. New infrastructure can be built but, as we examine in the next chapter, airport expansion is fraught with competing priorities and limitations. Roger Sealey of Unite told the Committee that he thought he would "be well in my grave before a new airport [in the South East] would get planning permission."[54] Given that the prospect of a major new hub was rejected in the Government's Future of Air Transport White Paper, we agree with him.

51. In the past, a strong argument against breaking up BAA's ownership of the three London major London airports has been that since they did not operate in the same markets—they did not sell the same product—there was nothing to compete over. To have the airports under separate ownership would not have increased competition because there would be nothing to compete over.

52. This point was confirmed in oral evidence from the airlines. Dr Ellis told us that "in terms of points to points services and the passengers using those, […] there is very significant competition between Gatwick and Heathrow, and indeed Stansted comes into that equation as well."[55] Brendan Gold of the Unite union told the committee that "the airports of the BAA have different markets to a greater extent, although the aviation industry is more blurred now between low fare and chartered players and the legacy carriers."[56] Simon Evans of the Air Transport Users' Council (AUC) noted that an individual may be a business passenger flying from Heathrow one week, and a no-frills leisure passenger flying from Stansted the next.[57]

53. On an international basis, Heathrow competes with other major European hubs—e.g. Paris, Frankfurt and Schiphol—for stopover traffic. Dr Ellis described Heathrow as "the best we have got in terms of being a competitive hub […] Heathrow is bad, but it is far and away the best opportunity we have got to be able to compete as a global hub". [58] For American Airlines, Don Langford told us that:

    With our customer flows to points beyond Europe, […] Heathrow is becoming a less popular transit hub and we are finding that customers are making their transfers at other airports within Europe, and we believe this to be a trend which is continuing.[59]

54. Heathrow is losing its popularity as a transit hub to other European airports. It is vital that Heathrow reverses this trend and retakes its place as the European hub of choice for international carriers. It is clear that a chronic shortage of capacity is hindering Heathrow's ability to provide the sort of service to which it should aspire. We therefore support the Government's proposal to add capacity at Heathrow. We consider capacity issues in more detail in Chapter 5 below.

Actual competition

55. Dr Bush explained the CAA's view of the degree to which airports currently compete with each other:

    We think there is interaction between those airports [Heathrow, Gatwick and Stansted] at the moment and interaction between the BAA airports and other airports in the system, so there are elements of competition there. We think that passengers do make choices between these airports. We do not believe that they are local monopolies in any sense; we think there is choice going on there. So there are the elements or the foundations for competition there, and around an airport like Stansted we think there is competitive pressure on Stansted from the airports around its boundary.[60]

As regulator, the CAA has a birds-eye view of the sector and we accept its analysis.

56. Mr Banfield explained that the Competition Commission would consider "what competition there would be between separately owned airports within the London area".[61] He went on to explain that if Stansted or Gatwick were sold, the ability of an independent airport to increase competition would depend on:

    the amount of capacity they may have, the extent to which they would compete in developing the facilities, the extent to which passengers or airlines would switch in response to lower prices and different investment programmes.[62]

57. There is limited competition between UK airports. With the demarcation between different types of airports becoming ever less clear, the theoretical restrictions on competition decrease and the old argument against divestment—which denied the possibility of competition altogether—loses force. We feel that there is room for more competition (especially between BAA's London airports) and that ending the current situation of common ownership would go a long way to realising this.

Operation

Spheres of responsibility

58. We have already described the connection between service quality and economic regulation. Although BAA is responsible for the operation of its airports, there are some things that it does not control. One very important area is security, where standards are set by the Transport Security and Contingencies section of the Department for Transport (Transec). BAA is responsible for meeting these standards. We received evidence that it had met difficulties on two fronts: contingency planning and recruiting enough security staff, particularly female search officers. Stephen Nelson of BAA admitted that before the security crisis which started on 10 August 2006, BAA "had insufficient staff for a steady state operation".[63] He described the problems BAA experienced with recruiting security staff, which can take up to 20 weeks.[64] Following the security crisis, BAA took on 2,000 extra staff out of 35,000 applicants, which doubled the size of their force.[65]

59. Mr Nelson explained that many other areas of service did not fall under BAA's operational remit. The Home Office runs immigration, and the airlines employ the staff who operate baggage reclaim. Check-in desks are operated by the airlines and punctuality of departure can be affected by many factors over which BAA has no control.[66] Simon Evans of the Air Transport Users' Council (AUC) explained that:

    At Heathrow they [passengers] blame the airport because they have seen a lot of the press coverage and they know that Heathrow is a constrained airport. If they miss their flight or if it is the flight that is delayed rather than that they are having to queue a long time to get through check-in or security, they blame the airline, and that is the right thing to do because their contact is with the airline and it is the airline that has liability for any damage they have suffered as a result of their experience.[67]

60. When things do go wrong for passengers, they are able to contact the AUC, which exists to "further the reasonable interests of users of air transport services", a requirement placed upon the CAA by the Airports Act 1982.[68] In our report on Passengers' Experiences of Air Travel we commended the work of the AUC and recommended that "the CAA look at devising some kind of cross-subsidy for the Council from airport and airline fines for poor performance and that the Council does more to advertise itself".[69] When we asked the AUC why it was not more proactive in its work, Simon Evans told us that this was not prioritised "because of the terms of reference and because of our budget".[70]

61. We have already called for the AUC's funding to be increased. It should become a proactive consumer body, going out and engaging with passengers. Its role to 'further the reasonable interests' of passengers should be interpreted as meaning more than just waiting for disgruntled passengers to make a complaint. However, if the AUC's terms of reference do need amending to allow it to become a genuinely proactive body, then the CAA and AUC should do so quickly.

62. BAA may feel as though it is taking a lot of the flak for things that are not part of its day to day responsibility, but this does not detract from the serious questions raised over mismanagement of resources and failure to plan adequately for contingencies which were far from unexpected, let alone inconceivable. With the ever-present possibility of extraordinary circumstances such as strikes or terrorist incidents, queues at airports are almost inevitable from time to time. Our criticism of BAA is that it should have predicted the predictable, and planned accordingly.

Capacity

Terminals

63. Many of the challenges relating to capacity at Heathrow have been attributed to lack of space in the terminals. With Terminal 5 due to open on 27 March 2008, the experience for many passengers will be much improved. Dr Harry Bush told us that:

We asked the witnesses from BAA what difference they thought Terminal 5 would have upon operations at Heathrow. Stephen Nelson told us that:

    Terminal 5 at a stroke will reduce the numbers of passengers going through Terminal 1 by about 50%, the numbers of passengers going through Terminal 4 by about 75%, and that will level out to 50, and the numbers of passengers going from Terminal 2 by about 15%. That will provide from April [2008] very considerable relief to passengers in physical terms.[72]

64. The main benefits arising from T5 will be for passengers and British Airways. The increase in capacity that a fifth terminal provides has given BAA the opportunity to move airlines around and improve the condition of the other terminals. This will benefit all other airlines and their passengers. It is however regrettable that BAA ever allowed the position to get as bad as it did.

Runways

65. As many aircraft are taking off from UK airports as current capacity will allow. The Government's position on new runways was set out in the 2003 White Paper: that two more runways should be built in the south east, one at Stansted and the other at Heathrow. Further development at Gatwick was ruled out until at least 2019. 'Mixed mode' operations—where runways are used for both take-offs and landings—are a way of extending capacity, but can only be introduced after a public consultation. BAA's plans to introduce mixed mode at Heathrow are now being proposed as a 'stepping stone' between the current level of traffic and the level of traffic that a third runway would allow. It is to the plans for expansion at Heathrow that we now turn.



53   Q 118, Ev 80 Back

54   Q 131 Back

55   Q 194 Back

56   Q 117 Back

57   Q 79 Back

58   Q 193 Back

59   Q 125 Back

60   Q 25 Back

61   ibid. Back

62   Q 26 Back

63   Q 209 Back

64   Q 229 Back

65   Q 233 Back

66   Q 242 Back

67   Q 97 Back

68   Airports Act 1982, section 4(1)(b) Back

69   Transport Committee, Passengers' Experiences of Air Travel, para 147 Back

70   Q 91 Back

71   Q 19 Back

72   Q 239 Back


 
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Prepared 14 March 2008