The future of aviation - Transport Committee Contents

3  The importance of aviation to the UK economy

Supporting UK plc

26. Much of the evidence we received in the course of our inquiry underlined the scale and importance of aviation to the UK economy. The aviation industry—airlines, airports, manufacturers etc—is important in its own right, directly employing some 200,000 people.

27. Perhaps more importantly, from a public policy perspective, aviation supports the wider economy. As world trade and production becomes increasingly global, so the importance of good international access grows. The Confederation of British Industry (CBI) emphasised to us the strategic importance to UK business of good international air services.[28] Aviation is important to a wide range of sectors of the economy, including inbound tourism, finance, knowledge and technology intensive industries and fresh produce, to name but some of the examples that we were given.

28. The Department for Transport and a number of witnesses cite the 2006 study by Oxford Economic Forecasting as the main evidence source for the economic benefits of aviation.[29] This estimates that, in 2004, the UK aviation industry directly contributed £11.4 billion, or 1.1% of UK GDP; and that at that time, 520,000 jobs in the UK directly or indirectly depended on the aviation industry.

29. Flying Matters drew our attention to a study by the National Endowment for Science, Technology and the Arts on the drivers of innovation throughout the UK regions. Flying Matters concluded from the study that

the new knowledge economy, which will play a vital role as we move through the recession and recover from it, relies heavily on international connectivity. This is important not just for London but for each of the regions and countries of the UK. [30]

30. Our witnesses, from across the UK, highlighted the importance of Heathrow to the national economy. As a major European hub-airport, Heathrow has 90 airlines which fly to 180 destinations.[31] It is the only UK airport with the critical mass of passengers and flights to enable such a hub to be economically viable. 35% of Heathrow's traffic consists of connecting passengers and, as the CAA points out, such passengers help to maintain the range and frequency of services offered, to the benefit of all passengers using the airport.[32] Heathrow has special importance for London as an international financial centre.[33] Seven out of the top 10 business routes in the world have Heathrow at one end.[34] Those representing business and transport interests outside London and the southeast also acknowledged the importance of Heathrow as a national economic asset, although they wanted better access to it.


31. Whilst the vast bulk of UK freight is exported by surface transport, a high proportion of the value of freight goes by air, mostly in the baggage holds of passenger aircraft.

The volume of freight travelling by air is very small—around 0.5% of the total. However, it has a high value—about 25% of the UK's trade by value. Air freight has a disproportionate importance as it serves industries which are core to the UK's economic future as a service economy. These include the industries such as electronics, telecoms, financial and business services.[35]

32. Air freight accounts for 40% of UK trade with non-EU destinations by value, the principal routes being transatlantic and to Asia. Inbound freight volumes are higher than outbound although recently the value of goods exported by air has exceeded that of goods imported by air.[36] Heathrow accounts for 25% of the UK's non-EU trade by value while East Midlands Airport is a key hub for express courier services. Freight movements are organised through hub-and-spoke systems and many UK regional airports with 24-hour operating licences feed into the principal EU freight hubs. These regional airports also facilitate the transfer of express post for Royal Mail and other time-sensitive goods such as newspapers. The global air freight industry has been very badly hit by the current recession and numerous freight aircraft are currently in storage.[37]


33. Business aviation has a specific role although the sector is experiencing a serious downturn because of the recession. According to TAG Farnborough, an exclusively business-oriented airport, business aviation is increasingly important to UK companies and international companies based in, and trading with, the UK. Business aviation provides air services according to the needs of the individual, rather than fixed services. TAG Farnborough says that the types of businesses and individuals that it serves are responsible for substantial inward investment in the UK as well as overseas trade.[38]

Aviation industry

34. The current recession is clearly creating severe difficulties for the industry, in the UK and worldwide. It is also hastening a restructuring of the airline industry. It seems that the trends towards airline mergers, such as British Airways-Iberia,[39] and global alliances, are inevitable. With adequate competition and safeguards, it is probably of overall benefit to passengers and businesses.


35. The First Stage Open Skies agreement between the EU and the USA came into effect in 2008.[40] To date, its principal impact in the UK has been to open up British Airways and Virgin Atlantic to greater competition. It has also caused some services to relocate from Gatwick and Manchester airports to Heathrow.[41] The introduction of Open Skies coincided with the global recession and it is difficult, at present, to predict its longer-term impacts.[42]

36. Discussions to extend the Open Skies agreement are ongoing between the European Commission and the US Federal Aviation Administration. This might allow further access to EU and US markets. The asymmetric nature of the Open Skies agreement is disadvantageous to the UK economy and particularly to the UK regions, and should be renegotiated at the earliest possible opportunity.

Regional economic development

37. Aviation was seen by witnesses as important to economic development outside London and the southeast. Mr Nick Paul, representing the eight English regional development agencies outside London, described the importance of aviation to the regions as "massive, and not only for local employment".[43] The agencies have quantified the economic benefit of air connections for regional economies and shown how some connections—mainly those linking business centres—are more valuable than others in terms of attracting inward investment.[44] According to The Northern Way, the eight regional airports of the North contributed £1.3 billion to the regional economy through direct and indirect benefits. Furthermore, they argue: "The catalytic benefits of international connectivity through the North's airports most probably greatly outweigh the more easily quantifiable direct and indirect impacts."[45]

38. Regional airports facilitate economic development and serve local business markets. Additional services create direct employment at airports and will have local multiplier effects. They also facilitate inward investment. A basic level of air connectivity was also seen as vital for business and communities in remote parts of the UK, such as the Scottish Highlands and Islands.

For the island and remote mainland communities, the only alternative to air travel for accessing the mainland and service centres (on occasions on another island) are ferry services or long journeys on poor quality land based infrastructure. Whilst the ferries and other modes offer relatively low fares, they cannot compete with air services for convenience and time-critical travel. [46]

The 2003 White Paper suggested that services to remote areas of the UK, including the Scottish Highlands and Islands, and parts of Wales and southwest England, might be enhanced through Public Service Obligations and Route Development Funds. In the event, relatively few services have been developed or sustained through these mechanisms.

39. Regional airports handle over 40% of all UK air traffic.[47] Some have grown rapidly because of the advent of low-cost carriers. Flybe, which specialises in linking regional airports, has been a particular success story, although there are signs of market saturation, such as the recent easyJet announcement that it will be withdrawing from East Midlands airport. Another important dimension, often overlooked in discussion of regional airports, is the importance of 'VFR' (visiting friends and relatives) traffic which is both domestic and international and again provides a key market for low-cost carriers.[48] However, low-cost carrier services are heavily skewed towards outbound leisure services and this has been a negative feature of both the Scottish and Northern Ireland route development schemes.

40. There has been a change in travel patterns, with more passengers using regional airports instead of travelling through London.[49] Over the period, 2000-2006, passenger numbers at regional airports grew by around 7% compared to 3% for the London airports.[50] The growth of direct short-haul international connections from regional airports, largely because of European liberalisation and the rise of the low-cost carriers, has, to some extent, compensated for the loss of connecting services to Heathrow. The CAA found that the strongest growth sector at regional airports from 2000-06 was international scheduled traffic, some of this being at the expense of charter carriers. Meanwhile, the growth rate in domestic traffic fell from 11% in 2003 to 0.2% in 2006.[51]

41. In addition, numerous regional airports have Air France/KLM connecting services to Paris Charles de Gaulle and Amsterdam Schiphol. Some, such as Bristol, Newcastle and Belfast International, have services to non-EU hubs, especially Dubai (Emirates) and Newark (Continental). It seems clear, however, given the withdrawal of British Airways and bmi transatlantic routes from Manchester, that further expansion of long-haul services from regional airports is unlikely. One problem lies in generating sufficient business-class demand, which is important for profitability. Continental, for example, sells a very high percentage of seats on the Belfast-Newark service but not in the business-class cabin.

42. The CAA observes that "there is growing competition between regional airports" while the challenge for them is "to continue expanding while maintaining their attractiveness to the passenger in terms of convenience and speed".[52] A number of regional airports are financially dependent on one or two operators. As such, they face 'churn' in services as airlines adopt different strategies and routes. Ryanair's decision in 2009 to transfer services from Manchester Airport to other UK regional airports is one such example.[53]

Contested issues

43. Whilst aviation is self-evidently an important part of the UK economy, some of our witnesses were concerned that the evidence base was too narrow and not sufficiently robust. They also argued that the scale of the economic benefits was sometimes exaggerated and that a more subtle understanding of the economic benefits and disadvantages was required as a basis for public policy decisions.[54] Essex County Council, for example, argued that there would be few, if any, economic benefits from an expansion of Stansted airport.[55]

44. Much of the concern related to the Oxford Economic Forecasting study which was cited by the Department for Transport and aviation industry witnesses in their evidence to our inquiry. Dr Givoni and Professor Banister,[56] the Aviation Environment Federation and HACAN,[57] criticised this study on several grounds, notably:

a)  It was not sufficiently independent, having been commissioned by the Department for Transport and the aviation industry;

b)  It has not been subjected to peer review;

c)  Some of its assumptions and methods appear to exaggerate the economic benefits, and

d)  The economic 'disbenefits' of aviation are underplayed.

45. Because of the importance of these economic issues to our inquiry, a special briefing paper was prepared for us by the House of Commons Scrutiny Unit (see Annex 1).[58] It points out that:

a)  The aviation industry does not directly correspond to any definition in official UK statistics (Standard Industrial Classification) and, as such, Oxford Economic Forecasting (OEF) had to design a methodology and make various assumptions to measure economic activity;

b)  The study does not fully address the concept or cost of the UK's 'tourism deficit'—the difference between spending by UK tourists overseas and spending by visitors to the UK. This is estimated elsewhere to amount to £20.2 billion in 2008, up from £5 billion in 1997. Most of this deficit arises from air travel.[59] The OEF study notes the trade imbalance but concludes that it is not a "structural problem".

46. The White Paper briefly addresses the issue of the tourism deficit. It notes that

The Government, working with VisitBritain and the Tourism Alliance, has launched a series of recent programmes and campaigns to attract foreign visitors and encourage domestic tourism, in the face of a widening gap in the tourism balance of payments.[60]

Since this time, the gap has continued to widen.

47. We put these issues to the Secretary of State for Transport, Rt Hon Lord Adonis, and to Mr Moor of the Department for Transport. Lord Adonis confirmed that the Department for Transport accepts the findings of the Oxford Economic Forecasting study. The Department for Transport's view on the issue of the tourism deficit is that it:

[…] is a measure of the difference between the expenditure of UK residents overseas and expenditure of foreign residents in the UK. It is not a measure of the impact of aviation on the contribution of the tourism industry to the value of the UK economy. It would not be meaningful to compare estimates of the tourism deficit directly with the £11 billion value added figure.[61]

48. The low-cost (or no-frills) carriers are now major players in relation to tourism. Yet the CAA found that while low-cost carriers have transformed patterns of air travel and the ways in which airports interact with passengers and booking procedures, "it is less clear that the growth of the no-frill sector has significantly affected overall rates of traffic growth". Rather, "much of their growth seems to have been at the expense of full-service scheduled carriers and, even more so, charter carriers". Stimulation of new traffic occurs on individual routes but it is difficult to discern "a change in the rate of growth at the level of the market overall".[62]

49. The advent of lower fares has made air travel accessible to more people. According to Flying Matters, "A revolution has taken place in flying since the 1960s. Today, flying is no longer the preserve of a privileged elite." The CAA found that people from all income-groups are flying more:

There has been a significant increase in the total number of people flying from all [income] groups. The more observable effect is of middle and higher income and socio-economic groups flying more often than in the past, and often on shorter trips.[63]

50. In this context, it was interesting to hear from Members of the UK Youth Parliament. They had a keen awareness of climate change issues and the environmental impacts of aviation. Equally, they enjoyed air travel and saw it as part of their future, for leisure, education and work purposes. In respect of the future of aviation, the views of young people did not appear to differ significantly from those of the general population.[64]


51. Aviation is important to the UK economy overall. It facilitates the flows of people, goods and finance into, out of, and within the UK. Good connectivity supports UK competitiveness in increasingly global markets. Aviation is also important to regional economic development.

52. These economic factors are the key justification for difficult decisions that sometimes need to be made regarding airport expansion, when it is necessary to weigh the economic benefits against the environmental and social costs. It is important therefore that the economic assessments are clear and robust whilst recognising that the sum of individual economic assessments underestimate the total value of aviation to the UK economy as, in all probability, if the aviation sector were removed from the UK, the economy would collapse.

53. The Government is right to support the sensible development of air transport in the UK. Choices between economic benefits and environmental costs sometimes need to be made. The "balanced strategy", set out in the 2003 Air Transport White Paper, requires a good evidence base. The Government should regularly update its assessment of the economic value of aviation to the UK economy and ensure that it is subject it to independent external scrutiny.

28   Ev 137 Back

29   Oxford Economic Forecasting, The Economic Contribution of the Aviation Industry in the UK, October 2006 Back

30   Ev 133 Back

31   Ev 330 Back

32   Ev 232 Back

33   City of London report by York Aviation, Aviation Services and the City, December 2008 Back

34   Ev 399 Back

35   Ev 181 Back

36   Oxford Economic Forecasting, The Economic Contribution of the Aviation Industry in the UK, October 2006, p 33 Back

37   Department for Transport, An analysis of the end-to-end journey of air freight through UK international gateways, May 2009 Back

38   Ev 99 Back

39   Financial Times, 13 November 2009, p 23 Back

40   See Annex 1. Back

41   Ev 299 Back

42   Ev 248 Back

43   Q 177 Back

44   Ev 191 Back

45   Ev 185 Back

46   Ev 384 Back

47   Civil Aviation Authority, Air services at UK regional airports, CAP775, 2007 Back

48   Civil Aviation Authority, International relations: the growth in air travel to visit friends and relatives, CAP787, 2009 Back

49   Civil Aviation Authority, Air services at UK regional airports, CAP775, 2007 Back

50   Civil Aviation Authority, Air services at UK regional airports, CAP775, 2007, p 1 Back

51   Civil Aviation Authority, Air services at UK regional airports, CAP775, 2007, p 3 Back

52   Civil Aviation Authority, Air services at UK regional airports, CAP775, 2007, p 1 Back

53   The Guardian, 17 August 2009 Back

54   Ev 122, Qq 287-288 [Brian Ross] Back

55   Ev 255 Back

56   Ev 46 Back

57   HACAN is a residents' group opposed to the expansion of Heathrow. See Ev 389 Back

58   Annex 2-Economic aspects of the future of aviation, House of Commons Scrutiny Unit, 2009. The Scrutiny Unit is a central unit within the House of Commons Department of Chamber and Committee Services that provides specialist legal, economic and accountancy advice.  Back

59   Two-thirds of overseas tourists travel to the UK by air according to the Department for Transport, The Future of Air Transport Progress Report, Cm 6977, December 2006, 4.18.  Back

60   Department for Transport, The Future of Air Transport, Cm 6046, December 2003, para 4.23 Back

61   Ev 116 Back

62   Civil Aviation Authority, No-Frills Carriers: Revolution or Evolution?, CAP770, 2006, pp 3-4 Back

63   Civil Aviation Authority, No-Frills Carriers: Revolution or Evolution?, CAP 770, 2006, p 5 Back

64   Q 484 ff Back

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Prepared 7 December 2009