House of Commons - Transport Committee

Transport and the Economy - Transport Committee Contents

Written evidence from the Airport Operators Association (AOA) (TE 88)

SUMMARY OF KEY POINTS

I. The AOA is the trade association that represents the interests of British airports. Our membership comprises 68 airport companies, representing all of the nation's international hub and major regional airports in addition to many serving community, business and general aviation.

II. Aviation is a major sector in its own right. Its supply chain contributes some £18 billion towards UK Gross Domestic Product (GDP) and provides employment for in excess of 200,000 people[289] . 40% of trade (by value) uses air.

III. Airports as gateways are even more important in the context of the government's desire to re-balance the economy, because they are funded by private capital and enable private sector growth in the wider economy. The government should build on the balanced approach to aviation growth in the 2003 White Paper, "The Future of Air Transport", to prioritise a policy framework that supports a competitive aviation sector.

IV. AOA members are working with the government to make passengers' experience of flying better. They are working closely with officials through the South East airports task force and in shaping the regulatory regime to place the passenger at the heart of airport regulation.

V. Growth in the sector is compatible with environmental targets. We support the Climate Change Committee's analysis that the government target to reduce the aviation sector's emissions to real 2005 levels by 2050 is compatible with 60% capacity growth. We also believe faster growth will be possible, as advances reduce emissions more quickly.

VI. Aviation pays its way and does not receive a tax subsidy. Ignoring Air Passenger Duty (APD), aviation's tax to GVA ratio is about 33% higher than the economy average of 32%. Adding APD into the equation, the ratio rises to 55%.[290] This affects the competitiveness of the UK aviation sector directly and dents economic growth across the country. It has a disproportionate effect outside London as new routes struggle to become viable.

VII. These effects will be made worse if the government follows through on its proposals to change the basis of aviation taxation from "per passenger" to "per plane". The government should use the European Emissions Trading Scheme (EU ETS) to capture aviation's carbon costs. Auction revenues to the UK government could be of order of £900 million. Moreover, phasing out APD for EU ETS could give a £4billion boost to the wider economy.

VIII. AOA supports proposals for a high speed rail network that is complementary to aviation, not a substitute. This would help the creation of a fast and integrated public transport network.

IX. AOA is concerned that the desire for improved efficiency and faster planning decisions for nationally significant projects, which lay behind the creation of an Integrated Planning Commission (IPC) is not lost in whatever final structure emerges following the IPC's dissolution.

X. We are also concerned about airport and surface access (roads, rail, etc.) projects not identified as of "national significance". These developments can be very significant for wide areas of the economy. We believe that if the localism agenda is not pursued correctly, for example if its structures are unable to take a view across wider areas of the economy, this could fail key infrastructure developments.

WHY AVIATION IS KEY TO FOSTERING PRIVATE SECTOR ECONOMIC GROWTH

1. The Eddington Transport Study was a major piece of work carried out in 2006. Eddington set out a comprehensive case for improving the UK's transport system, based on "clear evidence that a comprehensive and high performing transport system is an important enabler of sustained economic prosperity". In other words an efficient transport system is an important driver of economic growth.

2. His recommendations focused on three key areas: "growing and congested urban areas, key inter-urban-corridors and key international gateways that are showing signs of increasing congestion". He cited these as the most heavily used and economically significant parts of the network. Airports are key international gateways and therefore one of the three most economically significant areas highlighted by Eddington.

3. Since the report, the economic situation in the UK has changed significantly as a result of the credit-crunch, and its implications for the availability of capital; as a result of the recent recession and the slow return to growth that is now being experienced; and as a result of the need to improve the position regarding public finances. Against this backdrop, the government will be looking to prioritise transport schemes that are low-cost in terms of public expenditure, or that can be funded by private capital.

4. With airports recognised as highly significant parts of the transport sector and with an emphasis on private capital, a pro-aviation policy allowing expansion within environmental limits should be a government priority.

5. While the Committee's suggested areas of focus major on the efficient use of public monies, it is important to stress that airports and aviation are funded almost exclusively by private capital. In terms of the public purse this amounts to "free" development from a government expenditure point of view. Airports require only broad policy support, yet contribute strongly to economic recovery and growth.

6. This submission therefore considers the Committee's overarching theme of "what the government's priorities should now be, in order to deliver growth, both nationally and regionally" in the context of a favourable policy framework for airports to thrive both financially and in terms of infrastructure.

AVIATION'S CONTRIBUTION TO THE UK ECONOMY

7. In 2009, AOA member airports handled more than 220 million passengers, over 2 million tonnes of freight and over 2.2 million air transport movements.

8. In 2007, Aviation and its supply chain contributed £18.4 billion towards UK Gross Domestic Product (GDP) and provided direct and indirect employment for 234,000 people across the UK.[291]

9. Air transport provides connectivity, linking the UK to global markets, both nationally and regionally. For example, Newcastle Airport's direct contribution to regional GDP in 2007 was calculated at just under £400 million.[292] North West Development Agency statistics show that 26% of inward investment projects in Manchester are from China, and are responsible for 5% of jobs created in the region. A further 34% of projects are from the US generating 59% of new jobs. Across the Northwest of England the US remains the key source of inward investment, followed by Germany, Switzerland and Japan.[293] It is unlikely that this level of investment would be achieved without access to aviation.

10. Clipper Windpower, a major US wind turbine manufacturer has a factory in North East England. The ability of air travel to allow business travel between the US, UK and destination markets such as China, the Middle East and Australasia was vital to the choice of location, the decision to invest, and the creation of jobs here in Britain.[294]

11. Air freight is also a key contributor to the UK economy: almost 40% of UK trade with non-EU countries by value is transported by air.[295]

12. The Business and General Aviation (GA) Sector is important too. GA covers a very wide range of activities, has many participants, and is significant in terms of economic size. In its 2006 Review of General Aviation[296], the CAA estimated a £1.4 billion direct economic contribution from GA comparing it to Virgin Atlantic in terms of economic contribution. It is also estimated to employ over 11,000 people in the UK. The business aviation sector, which is growing strongly, makes up the lion's share of the overall economic contribution

13. Aviation has a key role in supporting the wider economy. It reduces the cost of transport of people and goods relative to alternative modes through faster journeys and by stimulating competition. Aviation also enhances the ability to conduct international trade by increasing connectivity between the UK and international destinations. This leads to increased investment and two-way trade, especially with emerging markets[297]. The importance of this has been highlighted by the prime minister on his recent visit to India.

14. Aviation can play a role in developing and sustaining regional economies.

A POLICY FRAMEWORK TO SUPPORT AVIATION AND BOOST PRIVATE SECTOR GROWTH

Aviation can grow within environmental limits

15. The Department for Transport forecasts that demand for flights at UK airports will rise to 424 million passengers by 2030.[298]

16. The industry recognizes that aviation has an environmental impact, but AOA believes that growth is possible within environmental limits. There is a current government target to reduce the aviation sector's emissions to real 2005 levels by 2050. AOA supports the 2009 analysis of the Climate Change Committee (CCC), which concluded that demand growth (of up to 60% to 2050) is compatible with the government's target, given conservative estimates of the rate that the sector can reduce its carbon footprint. However, we believe that demand growth greater than this figure will be possible, as technological and other advances reduce emissions more quickly than current projections suggest.

17. The industry is working to address its environmental impact through a raft of initiatives both individually and through Sustainable Aviation. AOA is developing work across UK airports to reduce emissions on the ground and measures such as emissions trading and the deployment of new technology will result in significant reductions in that environmental impact. The implementation of Single European Sky (SESAR)[299] is vital to the provision of new airspace capacity, and will generate environmental benefits.

18. To gain the full economic and social benefit of rising demand, access to aviation will need to grow through both the best use of existing airports and the provision of additional capacity through the development of new terminals and eventually additional runway capacity. While new runways in the South East have been ruled out by the government for the short term, this decision still leaves a series of policy questions open. In particular, there is a need to address what role non-South East airports can play in an integrated transport network.

19. Aside from these macro issues there are also policy questions about how aviation is taxed; how current planning law might be best designed to support key international gateways; and how the now more limited funds available for public funding of transport can be administered to provide best value for money in improving surface access to airports. These more specific policy issues, also key to a thriving aviation sector and private sector economic growth, are discussed below.

Competiveness: Aviation tax damages the sector and growth in the wider economy

20. UK Aviation taxes are the heaviest in the EU.[300] Air Passenger Duty (APD) - the UK's current aviation tax -was increased in November 2009 and will be increased again in November 2010. These rises directly reduce the competitiveness of the UK's aviation sector and the wider economy. Nowadays airports compete with their counterparts in Europe. Especially in difficult economic times when capital is in short supply, airlines have a limited number of aircraft to deploy on new routes and are highly discerning about route profitability. The UK's unilateral system of tax adds an on-cost, making it significantly harder for UK airports to compete for new routes offered by an increasingly footloose airline market.

21. Excessive levels of tax also damage the wider economy. AOA estimates that economy-wide the 2009-10 rises in APD could cost more than £0.75 billion annually and endanger more than 10,000 jobs after 2010.[301]

22. Aviation pays its way and does not receive a tax subsidy. A good overall measure of whether a sector pays its fair share of tax is the ratio of tax paid to the Exchequer to the amount of gross value added (wealth created) by the sector. Leaving APD to one side, aviation's tax to GVA ratio was 32.5% in 2007-08, higher than the economy average 32.1%. Adding APD into the equation, the ratio rises to 54.5%.[302]

23. Taxes have a disproportionate effect in the regions, particularly on direct international routes. They also penalise new routes as they struggle to become viable. This has the effect of strangling routes from UK regional airports: Liverpool John Lennon Airport has lost five European and two US routes since APD was doubled in February 2007.[303]

24. These effects of APD would be made worse if the government follows through on its proposals to change the basis of aviation taxation from "per passenger" to "per plane". A Per Plane Duty (PPD) will not be any more environmentally efficient than Air Passenger Duty (APD). Although the concept is to encourage airlines to fly fuller planes, aircraft load factors are already high - 80.9% on average.

25. Moreover, while APD in its current form can be charged at the long haul (and therefore higher) rate for a passenger interlining via a European hub, changing to a PPD will only allow the government to levy tax on the first leg of the flight ie. the first (short haul) part of the trip from the UK to the European Hub. By definition the tax cannot be applied to a second long haul flight departing from a European Hub, because the UK has no jurisdiction to tax "per plane" on an aircraft taking off from a non-UK-airport. This will create an environmentally perverse incentive for goods and people to fly via competing European hubs, resulting in more emissions not less.

26. Air freight represents 1.3% by weight, but 50% by value of UK extra-EU exports. 65% of air freight travels in passenger aircraft, which are already covered by APD and are thus in the scope of "environmental" taxes on aviation.

27. Freight is highly sensitive to price. Cargoes are always moved by the cheapest route, unless a premium on speed applies. Air freight capacity is sold for as little as 5p per kilogramme. Air shipping firms will move business for savings as small as 0.5p per kilogramme. A typical air freight service from a UK airport to Hong-Kong (c. 9,500 km) would generate revenues per tonne kilometre (RTK) of only 13 pence. This flight would generate a one-way profit of £5,618. The tax liability per-departing flight could be in the region of £8,000. This would result in turning a profit into an operating loss of around £2,000. This would be unsustainable.

28. AOA believes that it makes no sense for the government to consider changing the basis of aviation tax at this point. Any changes will take time to consult on and implement. Instead the government should use the mechanisms already in place for capturing aviation's carbon costs through the European Emissions Trading Scheme (EU ETS). Auction revenues to the UK government could be in the order of £900million.

29. Phasing out APD as EU ETS comes in would have economic benefits for the wider economy and would still mean that aviation covers its external costs, and pays its fair share of the tax burden. Phasing out APD could result in a £4 billion increase in GVA, over 100,000 more jobs and increased tax revenues of almost £2 billion elsewhere in the economy by 2020.[304]

The Government's better not bigger agenda

30. AOA's members are working closely with the government (which has ruled out new airport infrastructure in the South East in the short term) on its better not bigger agenda. The quality of the passenger experience is a critical element in encouraging people to fly for business or leisure, allowing the UK to reap the associated economic benefits. Members and AOA are working through the South East Airports Task Force and through the Civil Aviation Authority's regulatory reform process to ensure that passengers' experience of airports continues to improve.

Aviation policy should support tourism

31. Tourism provides employment for over 2.5 million people, and supports more than 200,000 businesses. Together this is almost 10% of the UK's economy. A half a percent increase in market share would yield an additional £2.5 billion for the economy and create 50,000 new jobs.

32. The government has signaled the tourism is key to the success of the UK economy. In a speech on 12 August, the Prime Minister set out his vision for tourism to play its part in re-balancing the UK economy. This included returning Britain to the top five destinations for tourists globally, and increasing our share of tourism from the Indian and Chinese markets. In the same speech, the Prime Minister recognised the importance of infrastructure

33. Airports are key to developing tourism. London is the main destination for visitors to the UK, attracting 50% of all visitors to the country. An integrated transport system allowing passengers to quickly and conveniently connect to destinations around the UK will encourage visitors to travel to the country and enable them to visit wider areas increasing the economic benefits of tourism.

34. Much is made of what (often, anti-aviation) campaigners refer to as the "tourism deficit". The argument goes that the amount of money spent abroad on tourism by British people, exceeds the amount spent in the UK by foreign tourists; and moreover, that the aviation industry is the enabler for this drain on resource. It should be hard for any thoughtful commentator to take this argument seriously. It's important first to understand economic reality. The UK is, and always has been, a trading nation. This means that it will play to its strengths and export in areas where it has economic advantage. In some sectors it will be a net exporter and in some a net importer. Some sectors, therefore, when looked at in isolation will be in surplus, and some in deficit. The UK needs both exports and imports to carry out foreign trade to the advantage of all its citizens. If trade in tourism (where the UK is net importer, financially speaking) were stopped, this would impact on trade somewhere where we are a net exporter. The result would be that all countries involved in trade would be worse off; not that the UK would be better off. Second, airports enable both imports and exports and to look at one sector in isolation makes little sense. Third, even if addressing any tourism deficit, by restricting airport capacity, made sense, the reality of doing this would be close to political suicide. The UK (while ensuring environmental limits are respected) should be celebrating the huge increase in mobility that liberalisation of aviation has brought to its citizens; not directing people who want to take a well earned holiday, or visit friends and relatives, to stay at home.

The planning system

35. The Eddington Transport Study found that 40% of delays at Heathrow, Gatwick and Manchester were caused by late arriving flights, due to a shortage of runway capacity. In 2006 Heathrow handled some 67 million passengers using facilities designed for around 40 million.[305] A shortage of space is at the root of many of the current problems faced by travelers at UK airports, particularly the passenger experience of security arrangements.

36. The provision of new capacity is, however, a challenge in itself. This was recognised in the Air Transport White Paper, which took a location-specific approach in identifying potential airports for future development.

37. The creation of the Infrastructure Planning Commission (IPC), and the related development of National Policy Statements, by the previous government was intended to improve the planning system for strategic infrastructure projects. While AOA understands the present administration's move to subsume the Commission back into government, we are concerned that the desire for improved efficiency and faster planning decisions that lay behind the IPCs creation is not lost on whatever new structure finally emerges.

38. We also remain concerned about the ability of the planning system to deliver capacity at airports not identified as of "national significance". These developments can be very significant as international gateways across wide areas of the economy. We believe that if not carried out correctly, the abolition of the Regional Development Agencies (RDAs), Regional Spacial Strategies (RSSs) and the creation of Local Enterprise Partnerships (LEPs) as part of a move towards a more local agenda could fail to support these key infrastructure developments.

An integrated public transport network and high speed rail

39. While AOA does not have detailed views on the detail of allocation of public funds for transport projects, infrastructure improvements that improve passenger surface access to airports are key in allowing airports to operate as true international gateways serving wide geographical areas of the economy.

40. The AOA supports proposals for a high speed rail network linking London with cities in the north of the UK. High speed rail is complementary to aviation (it cannot substitute for domestic flights on many routes), and the travelling public would benefit from the connection of airports to such a network. Together, aviation and rail would help in the creation of a fast, convenient, and integrated public transport network. For this reason we support public funding for the network, even at a time where options are more limited.

41. The 2003 Air Transport White Paper required airports to develop master plans which include strategies to encourage more sustainable forms of surface access. Many of these master plans included investment in local infrastructure and airports have invested in improving public transport hubs.

42. For example, Manchester and Stansted airports have both been instrumental in the creation of public transport interchanges. Birmingham International Airport has pursued the expansion of the Midland Metro Link to serve local communities and reduce car journeys. Liverpool John Lennon airport saw a 4% increase in public transport use between 2005 and 2007; ahead of a target date of 2008 for such an improvement.[306] At Bournemouth, Manchester and East Midlands airports, electric car and scooter trials are currently underway on the airport sites.[307] Similarly, the AirTrack scheme to link Heathrow with train services to the south and west of London is planned to increase the proportion of people travelling to Heathrow by public transport to 45% by 2015.[308]

43. Many of these improvements are funded by private sector capital, but allocation of public funds can also be a key part of the mix to ensure that a project with many stakeholders comes to fruition. It is critical that priority is still given to funding for projects where these are improvements that contribute to the creation of an integrated transport network in the UK.

44. Moreover, it is key that the government's localism agenda, discussed in 30 above, does not result in support or funding for key surface access projects being lost as a result of too local a focus, rather than considering the wider picture over the catchment for the international gateway.

September 2010

289 Oxera, What is the contribution of aviation to the UK economy? (November 2009). Back

290 Oxera, op. cit. Back

291 Oxera, op. cit. Back

292 Ecotec (2007). Back

293 MIDAS, http://www.investinmanchester.com/news/northwest-remains-uks-leading-region-for-foreign-direct-investment-outside-the-southeast/ (2009). Back

294 Clipper Windpower was interviewed by Newcastle Airport, for the AOA. See http://www.clipperwind.com/ Back

295 DfT The air freight end-to-end journey (May 2009). Back

296 CAA, A Strategic Review of General Aviation in the UK (July 2006). Back

297 Oxera, op. cit. Back

298 DfT Central Forecast (2009). Back

299 SESAR- Single European Sky ATM Research: a project to update European airspace management across national borders. See below. Back