Transport and the economy

Memorandum from British Airways plc

Introduction

British Airways welcomes the opportunity to submit evidence to the House of Commons Transport Select Committee’s inquiry into ‘Transport and the Economy’.

British Airways is one of the world’s largest international airlines, carrying almost 32 million passengers worldwide on almost 750 daily flights in the financial year to 31 March 2010. The airline employs 40,000 people, the vast majority of these at its sites throughout the UK.

The airline’s two main operating bases are London’s Heathrow and Gatwick airports, with a smaller base at London City airport serving New York and European business destinations. From these, British Airways flies 238 aircraft to 155 destinations in 70 countries. In addition to passengers, the airline also transported 760,000 tonnes of cargo around the globe.

Overview

1. Whilst the UK faces a record fiscal deficit that must be addressed, Government needs to ensure that it prioritises areas that most support economic growth. This should include physical infrastructure schemes that provide the greatest long-term benefit to the economic growth and success of the UK.

2. It requires a clear analysis of the country’s strategic transport needs and the creation of a robust analytical framework to identify the transport projects that will make the greatest contribution to GDP so that these projects can be prioritised.

3. The methodology used to measure the net benefits of proposed transport schemes should be modified to include not only welfare benefits to users but an analysis of wider economic effects schemes would bring, particularly agglomeration benefits.

4. It is also important that the streamlining of the planning system that was to be delivered through the Independent Planning Commission is not lost by the changes that will be introduced by the Coalition if private funding is to be found for the strategic schemes identified.

5. The Government has a key role to play in creating a modern integrated transport network for the UK by investing in the necessary infrastructure where required and by setting a clear vision and policy framework to attract private investment for other projects.

6. Aviation is a clear enabler of economic growth. However, the UK’s international gateways are full. Aviation infrastructure is and can continue to be privately funded, which means that the economic benefits associated with its delivery can be realised without being a burden on the public purse.

7. However, a clear national policy framework is a pre-requisite to enable investment in the infrastructure necessary to enable the UK’s air connections to the world keep pace with those of its competitors and support the key drivers of growth, including inward investment, exports and tourism. Without a clear national policy, investment in the physical infrastructure needed to ensure the UK’s strategic transport needs are met will not take place in a timely way.

8. In addition to infrastructure investment the Committee should also consider the effect of aviation tax policies on connectivity and the economy.

Transport infrastructure remains critical to securing growth

9. Economic conditions have materially changed since 2006. Growth has slowed significantly and the UK economic deficit has risen accordingly. Budgetary constraints are being applied across all sectors of the economy, and a far-reaching review of Government spending is underway.

10. What has not changed is the urgent need to improve the UK’s transport infrastructure. The Eddington Report recognised that "a comprehensive and high-performing transport system is an important enabler of sustained economic prosperity." A good transport system is even more critical today to maintain and improve local, regional, national and international connections and to ensure UK targets for a trade-led recovery and future growth are met.

11. Sir Rod’s report highlighted that in countries with well-developed transport networks, it is transport constraints that are most likely to impact upon a nation’s productivity and competitiveness. Thus it is arguably more important today that transport spending continues at the levels previously planned to facilitate the much-needed growth in the UK economy.

12. It is clear that difficult choices will need to be made in relation to public funding of transport policy. This will require a clear analysis of the country’s strategic transport needs and the creation of a robust analytical framework to identify the transport projects that will make the greatest contribution to GDP so that these projects can be prioritised.

13. For example, a modern integrated transport network for the UK is vital. Connecting international gateways to national transport infrastructure would produce significant benefits for the UK. At Heathrow schemes such as Crossrail and Airtrack, which will enhance connectivity, should be a priority. Furthermore schemes such as High Speed Two should look to connect to key international gateways, such as Heathrow Airport and High Speed One, in order to realise the maximum benefits for the UK. These must be considered as part of the ‘big picture’ when considering the transport projects that should be advanced.

14. The future health of the UK economy will depend on encouraging inward investment, growing its international trading links, both with existing trading partners and with emerging economies such as China and India and diversifying from its dependence on the financial services sector.

15. Aviation is a key enabler to achieving this aim. But the UK international gateways are full and it is clear that substantial new capacity will be needed to meet the demands of a growing economy.

16. As aviation self-funds all its infrastructure, development and operational costs without recourse to the public purse, the ability to provide the necessary infrastructure is less constrained by public spending priorities than in publicly funded transport segments. However, private investment cannot come forward without a clear policy framework. There is a great need for a clear policy that articulates how the UK’s international gateways should be sustainably developed to maintain and improve the necessary connections between the UK and the world to support growth through inward investment, exports and tourism.

17. As recently highlighted by the Prime Minister, tourism is a significant sector of the UK economy and is to be encouraged to grow. Britain attracts millions of inbound visitors each year, and in 2009, three quarters of them arrived by air. These overseas visitors spent nearly £14 billion in the UK last year, and many were from places realistically accessible only by air journeys, such as North America, Japan, South Asia, the Middle East and Australasia.

Prioritising the schemes that will most contribute to growth

18. The public transport spending priorities set out in the Eddington Report in 2006 remain valid. Government should focus action and spending on those parts of the system where networks are critical in supporting economic growth, and where there are clear signals that they are under-performing. It must be concentrated on the areas that will generate the greatest economic benefits – not just to transport, but also for business, housing, new inter-regional connections and growth.

19. Transport projects should be prioritised based on their long-term contribution to the economy. One of the issues that the Committee should examine in this context is whether improvements can be made to the framework used by Government to identify which projects contribute most to growth. The methodology currently used to assess the benefits of proposed transport schemes appears to be narrowly based on direct benefit to users. Whilst this is clearly important, it ignores the wider economic impacts that can result from transport schemes, such as agglomeration impacts.

20. Similarly, we invite the Committee to assess the extent to which the methodology used in setting tax policy considers the impact on transport, the economy and the quality of air links between the UK and world. Tax policy has a direct impact not only the UK aviation industry, but on connectivity, both at national and regional level. In considering tax changes, it is important to assess the wider economic, competitive and social impacts. (See Appendix A.)

21. Among the strategic priorities for long-term transport policy identified in 2006, key international gateways that are heavily congested and unreliable must remain a focus for Government, particularly as the current constraints on the UK’s international aviation gateway have the potential to hold back economic growth.

22. All regions of the UK benefit from London Heathrow’s status as one of the leading transport hubs in Europe. UK connectivity to all parts of the globe, although falling behind that of its major competitors, is a key attraction for overseas businesses looking to relocate or invest in the EU and a major benefit to British companies trading worldwide.

23. In 2006, the Oxford Economic Forecasting (OEF) study, ‘The Economic Contribution of the Aviation Industry in the UK’, established that "aviation is a substantial UK industry in its own right. But its key contribution to the UK economy is in helping other sectors to operate more efficiently and to compete in the global economy, supporting productivity and economic growth across UK plc as a whole."

24. Demand for flights will grow. The question is how the UK Government proposes to encourage aviation to meet this increased demand and ensure the prosperity of the UK economy, London and the regions.

25. European (and Middle Eastern) hubs are expanding whilst the UK’s main international gateways are not. European economies will benefit at our expense. It is no accident that three of the most successful European nations - Germany, France and the Netherlands - are home to the three most successful European intermodal transport hubs at Frankfurt, Paris and Amsterdam.

26. Although both the Eddington Report and the OEF study were published in 2006, the premise of both – that aviation is a key economic driver – is stronger today as the Government seeks an export-led recovery for the UK.

Long-term physical infrastructure should be prioritised.

27. Eddington identified that "the economic case for targeted new infrastructure is strong and offers very high returns………….the Government should therefore continue to deliver, together with the private sector, sustained transport investment".

28. Given the scarcity of resources, for publicly funded projects these should be focused on physical infrastructure. As the OEF recognised, such projects increase long-term economic output more than any other kind of physical investment.

29. Where it is possible for that infrastructure to be built entirely with private funding or with private contributions (such as in aviation) this should be given policy support.

30. The UK aviation sector is a successful industry in its own right and as an economic driver for the UK economy. There is no capital expenditure by Government on aviation itself; it is an entirely privately funded industry, free of public subsidy. The industry recognises that it is crucial to maintain investment for its long-term future, despite the downturn in economic conditions.

31. For example, the regulatory environment means that the capital expenditure programme for Heathrow that was agreed in the 2008 quinquennial settlement remains in place. Between 2008 and 2013, £4.5 billion of committed capital expenditure will be delivered. This includes replacing existing infrastructure and the construction of the new Heathrow East Terminal; major operational changes following the cessation of the Cranford Agreement; and enhanced public transport access and connectivity for the UK’s key global international hub airport.

32. However, it is vital that the publicly funded investment in key long-term surface access transport projects that will increase access to international gateways should be maintained. The key European intermodal transport hubs mentioned above have recognised this and are expanding surface access facilities at the same time as the core infrastructure. In the UK, the Crossrail and Airtrack schemes, and maintaining the direct Gatwick Express-Victoria link, are just three examples of important public transport projects that will bring wider economic benefits to their regions and should be prioritised.

33. Furthermore, direct links between the proposed High Speed Rail 2 network and the country’s international gateways must be agreed. It is estimated that the HSR2 section between London and Birmingham alone will not be operational until 2026 at the earliest, and it will cost £16 - £17 billion. The proposals to serve Manchester and Leeds will cost an estimated £30 billion of public money.

New planning system must be streamlined

34. The absence of regional bodies and the abolition of regional spatial strategies are a significant concern for transport providers and strategists. Major transport investment projects are not generally confined to local areas in either impact or benefit, and many operate across regional boundaries e.g. rail and road schemes. We seek answers from Government as to the next steps.

35. With the abolition of regional bodies and the Independent Planning Commission, it is not clear what mechanisms or organisations will assume responsibility for investment, economic and wider planning issues. Local partnerships are being encouraged, but inter-urban and inter-regional benefits will no longer be championed for large-scale projects. A localism agenda pursued at all costs will be detrimental to strategic transport planning.

36. Whilst we recognise the Government’s decision to change the system put in place in 2008, it is important that the changes be done quickly and that the benefits of a more streamlined and faster process for the approval of major infrastructure projects should not be lost.

37. Furthermore, the lack of a National Policy Statement for aviation leaves the industry without a coherent policy for the future direction of aviation in the UK. The Government has yet to demonstrate that it has adequate structures in place to progress major transport infrastructure projects through the new planning system.

38. Investment in aviation is necessarily long-term, from the building of infrastructure to the introduction of new technology to the purchase of new aircraft. Major projects do not happen in the short-term nor come cheaply. Without strategic direction and clear guidance on what the UK aviation industry will be in 10 or 20 years, the industry’s ability to sustain and assist the growth of the UK economy will be seriously curtailed.

September 2010

Appendix A

Impact of tax policy on UK connectivity and growth

A1. Tax policy has a direct impact not only the UK aviation industry, but on connectivity, both at national and regional level. In considering tax changes, it is important to assess the wider economic, competitive and social impacts.

A2. Factors that should be included in any assessment of taxation proposals should include the impact of the measure on the number of quality and connections to and from the UK, on costs of UK exporters and importers and on the social aspects of access by the public to flying as well as the direct impact on the UK aviation industry.

A3. In that context we note that the proposals for a move to a per plane tax would drive transfer passengers to other European hubs, thus endangering many direct longhaul routes from the UK that are only sustainable because of transfer passenger feed.

A4. Furthermore, moving to a per plane tax will be damaging to UK exporters and importers. It is expected that specialist freight handlers will simply avoid the UK and transfer operations to continental airports where taxation levels are far lower. This will result in limited options and increased delays for UK manufacturers and producers, as goods are transported by road to Europe for onward distribution.

A5. 30 per cent of the UK’s exports by value are transported by air. In 2009-10, British Airways flew 760,000 tonnes of cargo, much of it direct transhipments. The cost of a per plane tax will be passed to the customer, making the goods-to-market more expensive for supplier, shipper and consumer.

A6. It is vital that the methodology used in evaluating the impact of aviation tax policy extends beyond the narrow assessment of how much revenue could be raised.

September 2010