Aviation Strategy

Written evidence from the Chartered Institute of Logistics

and Transport in the UK (AS 23)

Summary

· International connectivity is the most important benefit of aviation to the UK economy.

· Air Passenger Duty is damaging the UK economy and should be reviewed now that the EU ETS includes aviation.

· In the longer term, the passenger experience will only be satisfactory if the aviation system operates well within its practical capacity.

· Aviation can be aligned with current policies for other modes, in particular for rail.

· Best use of existing capacity can be achieved by the removal of barriers which prevent a level playing field and by the application of common standards. This means the removal of price regulation, except at Heathrow, leaving normal competition law to apply, and the recognition that all major airports other than Heathrow can be promoted as 'National' airports.

· Government policy should always try to seek a balance between the economic benefits and the environmental impacts, both global and local. Growth is the key without which benefits and reduced impacts will not be achieved.

· EU aviation policy is generally helpful, with some exceptions.

· Rather than a step change, the UK needs a continual growth of aviation capacity to meet its short, medium and long term needs in line with its climate change targets.

Introduction

The Chartered Institute of Logistics and Transport in the UK - CILT(UK) - is the professional body for individuals and organisations involved in all aspects of transport and logistics. It has over 19,000 members in numerous disciplines, including the aviation industry and transport planning. As it is not a lobbying organisation it is able to provide a considered and objective response on matters of transport policy. Through its structure of forums and regional groups it provides a network for professionals in the transport industries to debate issues and disseminate good practice. This response has been prepared by the CILT(UK)’s Aviation Forum, the Chairman of which has previously appeared to give evidence to the Select Committee.

Question 1. What should be the objectives of Government policy on Aviation?

a. How important is International aviation connectivity to the UK aviation industry?

b What are the benefits of aviation to the UK economy?

International connectivity is one part of the benefits from the airline industry and, for the UK economy, it is the most important one. Connectivity has been crucial to UK business since the Industrial Revolution because of the UK’s geographic position and the need to export in order to achieve continued growth.

After the Second World War technological advances in aircraft design progressively raised the profile of air travel as an essential generator of economic growth. It is now crucial both to growth of the economy and to the prosperity of key industries such as financial services, the high tech sector and inbound leisure. The most obvious example of this is at Heathrow where nearly two thirds of passengers are business or inbound leisure and there is ample evidence from numerous studies of the economic benefit from international routes at airports throughout the country.

Equally the outbound leisure sector has, over the last 15 years, been radically changed by the "no frills carriers" whose business model is substantially different from both the "legacy carriers" and also the inclusive tour charter airlines (who were the originators of low cost air travel within Europe). The ability of the no frills airlines to set up operating bases at local airports throughout Europe has revolutionised the network of scheduled services to the detriment of both charter and legacy airlines. These networks offer substantially more options for business and leisure travellers to use direct air services from local airports and generate significant employment around many of those UK airports.

In addition to being a local employment generator, leisure air services meet the aspirations and expectations of the UK population for worldwide travel, to holiday overseas, visit friends and relatives and attend international sporting events etc. In the earlier days of the low cost carriers there was concern that promotional fares during low season periods (e.g. 1million tickets at £1) created "unnecessary" and environmentally unfriendly travel. The hike in both fuel prices and APD has largely removed that issue. It should also be emphasised that for legacy carriers the frequency and range of international destinations that is so important to the business sector is normally only possible due to the significant contribution to load factors and revenue from leisure travel.

Transfer traffic benefits the UK by making routes viable that would not be so if they relied on point-to-point traffic alone. Transfers have grown steadily as sophisticated yield management systems have enabled airlines to attract non UK passengers, which then benefits the UK economy by ensuring that routes are operated more frequently or to a wider range of destinations. Detailed evidence is given in the Frontier Economics report of September 2011 [1] .

c. What is the impact of Air Passenger Duty on the aviation industry?

The Institute's response to the All Party Parliamentary Group on Aviation Competitiveness [2] made the following points:

· The level of APD is now damaging to the UK economy and the UK airline industry and an unreasonable cost to UK business.

· The structure of APD works against establishing business and exports in new markets and emerging economies.

· The structure of APD is anomalous and arbitrary. The class bands are economically damaging to UK airlines and the inbound leisure sector, whilst the distance "banding" is quite simply discriminatory.

· APD discriminates against travel (particularly business travel) in those areas further away from London and the SE - the more so for the north and Scotland.

· APD should be radically reviewed if the EU’s ETS is successful.

d How should improving the passenger experience be reflected in the Government’s aviation strategy?

The Government's South East Airports Taskforce, in examining how the passenger experience at airports could be improved, highlighted some problems under Government control which could benefit of both passengers and airlines – in particular the Border Agency’s staffing of immigration checks and a more holistic approach to security. At Heathrow, the operational freedoms should enable a reduction in delays, although at this time there is little evidence to show how effective NATS has been in making use of this.

For many years, passengers have compared their experience at Heathrow unfavourably with modern facilities in the Middle and Far East and, more recently, with new airports are being developed throughout the BRIC nations. Primarily this is due to delays caused by the planning system before Terminal 5 could be completed, and the knock on delays to passenger terminal redevelopment in the Central Area. The current hiatus affecting any further development strategy for airport development in the South East will inevitably have a similar knock-on impact in years ahead. A longer term strategy is essential to safeguarding the passenger experience in future years.

e. Where does aviation fit in with the overall transport strategy?

It is questionable whether an overall transport strategy exists, but the objective is clearly to deal with congestion which is inhibiting economic growth. The combination of current policies for various modes could, however, be considered as an overall strategy. Aviation strategy should be aligned with these other modal strategies under an overall objective of transport to support sustainable economic growth and contribute to social welfare.

The relationship of aviation to the road strategy is relatively straightforward. There is now only limited new road building, and the emphasis is on better use of existing roads through management, the continuing drive to improve safety and environmental improvements. This means that airport development should be located in places where the existing roads can be adapted to accommodate growth, which in some cases this will mean road capacity increases. In the longer term, the method of payment for roads will have to change with the reduction in fuel duty revenue, and new payment methods will better reflect the benefit obtained. It is likely that airport road access will be valued more than many other road trips, which will enable airport road access achieve an appropriate priority.

Complementary rail strategies are critical to the development of aviation. The UK led the way in establishing rail access to airports, but some current trends are resulting in a deterioration in the relationship. Gatwick and Stansted Airports once had, and Heathrow still has, successful dedicated express rail services which segmented the market, provided excellent service and brought in premium revenue. Although such services are highly efficient in terms of all day usage, at peak hours they are seen to have spare capacity when commuter services are full. This capacity has then been reallocated to commuter services and the effect has been, and will increasingly be, to make the services less attractive to air passengers. This will reduce overall rail mode share at airports, re-introduce the conflict between air passengers and commuters, reduce rail revenue (because passengers will not pay a premium fare for a non premium service) and inhibit the growth of these airports. Non dedicated rail services operate satisfactorily as a complement to the dedicated services at the large airports (eg. the Piccadilly Line to Heathrow). At smaller airports, or outside the London area where rail commuting is not so significant, non dedicated services can provide a satisfactory airport link.

The strategy for HS2 should also be consistent with aviation policy. Ideally, airports should be served by High Speed Lines but the benefits to air passengers are limited, and may not sufficient to overcome the costs and time disbenefits to non air passengers. Thus the Birmingham International Station on HS2 is appropriate because it does not require a significant time penalty and also serves other markets in the West Midlands, but it will be difficult to justify a spur to Heathrow.

CILT's study of the Transport Use of Carbon [3] shows that rail generally uses less carbon than air travel, but this is critically dependent on the decarbonisation of electricity and there are plenty of examples of sustainable short haul air travel. Passengers will also benefit if air services are not prevented from competing with rail. It is also clear that high speed rail will not substitute for air travel to an extent that would significantly reduce the need for additional airport capacity.

Local transport strategies are generally well aligned with aviation strategies. Airports were among the first organisations to develop travel plans for their employees and there are numerous examples of local bus marketing support, car sharing, cycle initiatives and other sustainable transport activities, involving many local stakeholders and organised through Airport Transport Forums.

It is legitimate for policy to require the aviation industry to contribute to the cost of a surface access improvement to the extent that it benefits, although an airport is a part of the transport network and not the same as a commercial developer. Neither should this be an excuse for Government to abrogate responsibility for the provision of transport improvements where these benefit the wider population, but happen to also serve an airport.

Question 2. How should we make the best use of existing aviation capacity?

a.  How do we make the best use of existing London airport capacity? Are the Government’s current measures sufficient?  What more could be done to improve passenger experience and airport resilience?

Essentially, we should let the market operate, with competition where possible and a level playing field and impose restrictions only where necessary to ensure that community impacts and benefits are balanced.

After the sale of Stansted by BAA, all the London airports will be in separate ownership (with the exception of Gatwick and London City having a degree of common ownership). It is difficult for airlines to obtain new slots at Heathrow, but there are slots available elsewhere, and different types of airport facilities are available in different locations in the South East. This means that passengers also will have a choice of airlines and types of service which leads to better passenger experience and competitive price.

With separate ownership, there is no theoretical reason for price regulation at any of the airports. However, Heathrow holds a unique position in the UK in terms of the long term shortage of capacity, its unique role as an international transfer hub (where it competes with other major European hubs) and its proximity to the high yield passenger market in London for which there is limited competition with London City). Years of price regulation with a shortage or runway capacity has distorted demand and led to a grey market in slots. Equally there is no evidence that airlines have chosen not to operate from other London airports because of the lack of price differentials.

On balance, we are in favour of ending specific price regulation at Gatwick and Stansted, noting that all airports are subject to normal competition law. In the case of Heathrow it is difficult to see how the removal of price regulation would be generally acceptable. However it is evident that the single till approach is now counterproductive (and there is also little to commend a dual till approach). The CAA needs to develop a more constructive approach which puts customer experience in a more central position.

In terms of other regulations, we would support the extension of fifth freedom policy to all London airports other than Heathrow, on the grounds that it would enable all these airports to compete for new services. But we would not expect it to generate much in the way of additional flights.

To ensure the balance of benefits with impacts, we support the application of common standards in terms of noise and other local impacts. It is quite clear that Heathrow's noise impact is very much greater than that of other London airports, but it is possible to relate this to the benefits to give a benefit/impact ratio. This will then provide guidance towards how much mitigation is appropriate and, more significantly, will enable an evidence based comparison of alternatives for expanding capacity.

b.  Does the Government’s current strategy make the best use of existing capacity at airports outside the south east? How could this be improved?

There are few restrictions on the use of airports outside the South East but, if any restrictions do arise which are stopping the introduction of new routes, such as the necessity of achieving bilateral agreement, they could be removed on a case by case basis.

We would agree that the distinction made in the past between the South East and the rest of the UK has not been helpful. We would instead suggest that, for the short and medium term, all of the UK's airports which can accommodate long haul international flights should be designated as 'National Airports' which would then enable them to be promoted around the world (eg. at airline scheduling events, or as part of trade missions) as gateways to the UK. This would mean that the situation is actively managed rather than simply waiting for the commercial decisions of airlines. Heathrow would, in practical terms, be the exception to this designation because it is effectively full and therefore is only be available for new services if slots can be acquired at excessive cost.

c.  How can surface access to airports be improved?

As noted in our answer to Question 1e, aviation is a transport mode and should not be treated as simply a commercial developer required to fund transport improvements. While it is legitimate to seek contributions to transport improvements associated with airport expansion, such contributions should be related to the benefits received. We would also wish to repeat the point made in answer to Question 1e that degrading dedicated airport rail services will reduce the attractiveness of rail as an airport access mode, re-create the conflicts between airport and non airport passengers that were the reason for introducing dedicated services, reduce revenue to Government and constrain the growth of airports.

Where airports are growing, it then becomes possible to justify surface access improvements. For example, if Heathrow grows, a western rail link at Heathrow would provide a welcome addition to the airport's rail catchment area provided it can be cost effective. Similarly, a HS2 link, initially via Old Oak Common and ultimately by a direct route, will provide a choice for journeys currently made by road. A HS2 station linked to a growing Birmingham Airport and, possibly in Phase 2, to Manchester Airport, would provide passengers with a greater choice through better accessibility.

Question 3. What constraints are there on increasing UK aviation capacity?

a.  Are the Government’s proposals to manage the impact of aviation on the local environment sufficient, particularly in terms of reducing the impact of noise on local residents?

Government should always seek a balance of impacts and benefits, so the reference in the Draft Aviation Policy Framework to the balanced approach is absolutely correct.

There are several ways of measuring aviation noise, but the 57 dB LAeq16h contour has the merit of being consistently measured across many airports over a long time, and should be retained. When considering expansion, alternatives should be compared in terms of the absolute numbers of people affected, the change over time, the change resulting from the expansion and the addition or reduction of noise impact over particular communities.

b.  Will the Government’s proposals help reduce carbon emissions and manage the impact of aviation on climate change? How can aviation be made more sustainable?

CILT supports the policy objective as set out in the Draft Aviation Policy Framework (paragraph 3.4). The Committee on Climate Change indicated that UK aviation can both grow and reduce carbon emissions significantly to achieve the UK carbon targets. CILT supports the inclusion of aviation in the EU Emissions Trading Scheme as an interim measure pending a world wide scheme implemented through ICAO. We also support the other measures outlined in Chapter 3 of the Draft Aviation Policy Framework, noting that they are all fully supported by the aviation industry through the Sustainable Aviation Group. Evidence from the US shows that, unless the industry is financially sound and growing, there will not be investment in new, more technologically advanced, aircraft.

c.  What is the relationship between the Government’s strategy and EU aviation policies?

The relevant EU policies include those relating to airspace, emissions trading, noise mapping, slot regulation, competition, bilateral agreements and passenger rights. In most cases, UK Government policy is aligned with these although there are examples where other EU countries do not appear to have the same enthusiasm for full implementation as the UK (eg. noise mapping). There are also examples where the EU seeks to resolve issues in some countries which are not a problem in the UK where competition is generally stronger (eg. ground handling).

In general terms EU aviation policy does not act as a constraint on increasing UK aviation capacity. It could be argued that EU policy encourages more growth than does the UK, as is evidenced by the faster growth rates achieved at many EU non UK airports. EU airspace policies such as the Single European Sky are particularly helpful in seeking to enable the sustainable growth of aviation, albeit they are very slow in being implemented.

Question 4. Do we need a step-change in UK aviation capacity? Why?

a.  What should this step-change be? Should there be a new hub airport? Where?

b.  What are the costs and benefits of these different ways to increase UK aviation capacity?

Since the 1960’s aviation policy has developed and been liberalised . Progressively from the early 1980’s the tight noose on the airports outside the London area – rigid Treasury controls on investment; the "Gateway" designation for long haul routes; rigid bilateral air service agreements, and Fifth Freedom restrictions on both cargo and then passenger services – have been removed. The London area Traffic Distribution Rules were removed more than 20 years ago.

However, expansion of airport runway capacity in the South East has fallen foul of successive governments - the reversal of projects to develop incrementally a four runway airport at Stansted, Cublington (which came out of the Roskill Commission), Foulness (advocated by one member of the Roskill Commission), the decision to shelve RUCATSE conclusions and finally the current administration’s reversal of the 2003 Aviation White Paper strategy.

Recent debate has been about a "hub airport for London" – this is an international transfer hub and is different to the "hub and spoke" model for domestic traffic so popular in the US. Over the last 20 years there has been a growing impetus in the number and size of international transfer hubs throughout the world. With the exception of those in the Emirates, this has been stimulated by the strength of the three main airline alliances.

Heathrow is now the only transfer hub airport in the country but its traffic mix is complex. Around 36% of Heathrow’s passengers were transfer journeys with a third not on British Airways. The closure of BMI will reduce non British Airways transfer journeys and has raised serious questions about the Star Alliance's ambitions to build a competing transfer hub using the new Terminal 2. Virgin Atlantic is trying to establish some domestic flights to replace feed lost from BMI. On the other hand British Airways now has sufficient new slots to handle its medium term ambitions – in any case over the last two years BA’s commercial priority has been to start additional European routes (i.e. Paris Orly, Gothenburg and Bologna) rather than new destinations in the BRIC countries.

The group of airlines which have least opportunity to expand flights or start services into Heathrow are long haul carriers who either are not in alliances or are not leading members. These airlines cannot afford the inflated price for such slots that become available at Heathrow. One or two have begun to use Gatwick but it is the failure to provide capacity for these airlines which is also reducing connectivity out of London.

Although there are examples around the world of cities with several airports (New York, Moscow), none of these are multiple transfer hubs. Like the airports serving London, each airport serves a particular market segment.

Turning to the "No Frills Airlines", recession and the combination of escalating fuel prices and APD has significantly reduced short break travel volumes and this looks likely to result in an adjustment to medium term demand for airport capacity in the South East.

All this raises the question of whether there is a real case for a "step change". Since RUCATSE CILT has consistently supported the development of a third runway at Heathrow, but it has to be recognised that the political will to deliver that is now uncertain to say the least.

The need for additional airport capacity exists in the short term and will continue in the long term. Rather than a step change, we need a continual growth in capacity, to match the demand that the Committee on Climate Change says is compatible with the UK's carbon targets. Any airport should be permitted to grow, within this overall limit and within local limits determined by whether the balance of benefits and local impacts. This implies that Heathrow should be maintained as the UK's hub with additional capacity permitted only if the significant local environmental impacts, in particular noise, can be addressed. Additional runway capacity at Gatwick and Stansted may also be justified in due course. At the other 'national' airports, additional capacity should be permitted, again within the overall CCC limit and in accordance with the local benefit/impact balance.

Allowing existing airports to expand will mean that the private sector will meet the entire costs of the expansion programme. Airports are all commercially operated and their income is from airlines and the passengers they serve, with no public subsidy.

The alternative proposed for a hub airport in the Thames Estuary has the potential to deliver a "World Class" facility when compared with capital cities with super-airports elsewhere. However, it raises many unanswered issues although there can be no doubt that it is technically achievable. These issues include the routes and costs of fast road and rail links to Central London; a rail terminus that has connections to distribute passengers around Central London; similar links to main catchment areas in the Home Counties; air traffic control conflicts internationally and with other London airports; the availability of sufficient public finance; risks from migrating wild fowl, and the massive scale of support infrastructure.

Perhaps the most unquantifiable risk concerns the inevitable closure of Heathrow which will be necessary to give any hope of a financial case for an estuarial airport. With so many businesses located to the west of London and the Thames Valley because of global connectivity there has to be uncertainty over how many will relocate premises and staff to the east of London or will they simply move to other centres in Europe.

16 October 2012