Transport CommitteeWritten evidence from British Airways (AS 110)

Introduction

British Airways is one of the world’s largest international airlines and the UK’s largest international scheduled airline, carrying approximately 35 million passengers worldwide annually on around 800 daily flights. The airline employs around 40,000 people, the vast majority of these at its sites throughout the UK. British Airways flies to more than 170 destinations in over 80 countries. In addition to passengers, the airline also transports cargo—more than 750,000 tonnes of cargo are carried each year.

In 2010, the airline completed its merger with Iberia of Spain to create the International Airlines Group (IAG). Following the acquisition of BMI earlier this year, our combined business offers flights to 205 destinations throughout the world on a fleet of 415 aircraft. It also commenced a joint business agreement with American Airlines, which further extends benefits for its customers.

The Select Committee’s inquiry is timely and important. British Airways, along with the rest of the aviation industry and much of the UK and international business community, has long argued that the existing policy vacuum surrounding the Government’s approach to aviation is unsustainable and damaging to the UK economy, and to its future ability to compete with key established and emerging economies. Following the publication of the Government’s Draft Aviation Policy Framework and the announcement of the appointment of Sir Howard Davies to chair an independent commission to consider the future direction of UK airports policy, it is imperative that Parliament scrutinises the Government’s progress and proposals.

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

1.1 The UK aviation sector operates in an intensely competitive global market. The overarching principle which should inform Government’s approach to developing such a policy should be to encourage the effective operation of free markets in aviation to meet passenger demand and customer needs in the UK, Europe, and beyond, and to intervene in that market only where merited by clear evidence of a market failure or overwhelming safety and security concerns. Government policy should also reflect the importance of aviation as a driver of the UK economy.

(a) How important is international aviation connectivity to the UK aviation industry?

1.2 For all parts of the aviation industry, international connectivity is vital to making UK aviation-related businesses globally competitive and ensuring that the sector is able to meet UK passenger and freight demand growth. The nature of the aviation industry means that, even for those businesses which operate principally within the UK or the EU, good international connectivity to key established and emerging markets, as well as domestic, regional, and European links are essential in attracting passengers, investment, and continued growth.

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

1.3 UK aviation supports approximately 920,000 jobs directly or indirectly through aviation companies and their supply chains, or through the spending by these direct or indirect employees through the economy. These are high-productivity jobs: the average air transport services employee generates £66,178 in Gross Value Added (GVA), more than twice the productivity of the average UK job.1 The aerospace manufacturing sector in the UK, of which UK airlines such as British Airways are a key customer, support approximately 264,000 jobs in the UK. The UK aviation sector contributes approximately 3.6% of UK GDP, with further, substantial benefits derived from aviation’s role in facilitating and supporting the vital inbound tourism sector.2

1.4 The wider economic benefits which the aviation industry confers on the UK economy are both more substantial and more difficult to isolate, as they permeate the economy. Air transport services allow UK businesses to access established and emerging markets, maintaining UK competitiveness and increasing international trade in goods and services. One in five UK businesses believes the quality of international connections, such as availability of or absence of direct flights, is a barrier to exporting.3 Air freight, much of which is carried as belly-hold cargo by passenger aircraft, transports 37% of goods exports by value.4

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

1.5 British Airways believes Air Passenger Duty (APD) is putting UK aviation at a unique and increasing disadvantage among European competitors. APD distorts international markets and undermines the UK’s attractiveness as a destination for business and tourism. APD is the highest aviation tax of its type in the world, while several European countries—Belgium, the Netherlands, and Denmark—have in recent years abandoned their aviation taxes in recognition of the economic damage they had done.

1.6 Each seat sold by British Airways to a foreign customer constitutes an important export for the UK economy—yet these exports are taxed at a rate which makes the UK uncompetitive. Airlines are unable to develop new routes—and therefore to invest in accompanying new aircraft, jobs and skills, which they would otherwise be able to do, because APD creates artificial barriers to expansion and unnecessarily increases the cost of travel for consumers and businesses. British Airways believes that the Government should conduct a thorough economic analysis of the effects of this tax, and abolish it.

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

1.7 UK airlines operate in an intensively competitive environment, where airlines operate with different business models with a clear emphasis on maintaining and improving the overall passenger experience. British Airways does not believe that there is a clear role for the Government to intervene in this market in the absence of clear evidence of a market failure. Moreover, the Civil Aviation Bill, as previously considered by the Select Committee, places the passenger’s interests at the head of the Civil Aviation Authority’s list of regulatory priorities.

1.8 There are two areas, however, where the Government can make a significant contribution to improving the passenger experience as part of its aviation strategy. First, in the area of immigration and border control, the Government currently has no clear incentive to ensure that passengers arriving in the UK receive efficient and prompt service from the UK Border Force. While airlines are subject to robust competition, and dominant airports are subject to economic regulation, the UK Border Force is subject only to ministerial oversight and the threat of parliamentary rebuke. A key plank of the Government’s aviation strategy should be to subject the Home Office and the Border Force to a clear, binding accountability and performance management regime which at least matches that to which airport operators at designated airports are subject.

1.9 Second, perhaps the single biggest improvement to passengers’ experience of UK aviation over the long term will come from the adoption of a clear, enduring aviation strategy which provides a robust roadmap for the provision of improved resilience of the UK’s hub airport, permitting the development of links to new emerging market destinations, and certainty on the future location of hub airport capacity.

(e) Where does aviation fit in the overall transport strategy?

1.10 Aviation should be seen as an integral element of the UK’s transport infrastructure, offering direct connections to international destinations but also important domestic connections both between points in the UK and to onward destinations, principally from the UK’s only hub airport at Heathrow. This connectivity is vital to businesses and individuals throughout the UK. The importance of aviation has been well recognised in many countries where sustained efforts have been made to ensure that aviation is fully integrated into the wider transport system

1.11 However, because aviation is a self-funding industry which does not receive public subsidies or rely on publicly funded infrastructure, UK Government policy on the integration of transport networks has historically paid scant regard to the role of aviation. This is perhaps best demonstrated by the weakness of planning for rail investment to integrate the UK’s major airports into the rail network. For example, the Government’s stated objective to align national strategies for aviation and high speed rail appears extremely challenging when the route for HS2 in the South East has been decided without any clear view on the future of the UK’s hub airport, at Heathrow.

2. How should we make 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?

2.1 British Airways believes that the best mechanism for optimising use of existing capacity is the current market-based system whereby airlines are subject to strong economic incentives to optimise the commercial returns from their use of airport capacity.

2.2 There is no clear, universal definition of the “best use” of airport capacity. “Best use” could be defined as: maximising the number of passengers; maximising the number of routes flown from a given airport; achieving an optimal balance between short-haul and long-haul routes, or specifying a given type of airline operation. Measures which seek to realise any one definition of “best use” are likely to carry unintended and perverse outcomes.

2.3 British Airways believes that the focus of immediate action should be on improving resilience in the operation of Heathrow airport within the existing cap on air transport movements. Improvements in resilience have a direct, positive impact on passenger experience, productivity, economic efficiency, and environmental performance. British Airways welcomes the Operational Freedoms trials to increase resilience during disruption.

2.4 British Airways is not in favour of the introduction of mixed mode runway operations to add more scheduled flights at Heathrow. We believe it will cause serious resilience problems at Heathrow which is already operating at 98.5% capacity. This would mean there is no ability to recover from, for example, adverse weather and would lead to regular cancellations and disruption for passengers.

2.5 Airspace is a finite resource and a critical national asset. British Airways believes that efficient airspace management and planning can improve the utilisation of London’s existing airport capacity. Key initiatives such as the UK’s Future Airspace strategy and the EU’s SESAR programme could improve punctuality, more efficient routings, less “stacking”, and improved passenger journeys and environmental performance.

(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?

2.6 Airports outside the South East play an important role in providing connectivity and feed for hub airports, and supporting point-to-point routes to international destinations. Many regional airports have direct international links, principally to hub airports in Europe, the Middle East, and North America. However, all airports outside the South East currently have spare capacity. There is no evidence that existing Government policy is leading to the under-utilisation of regional airports. Any action to increase the utilisation of regional airports would require intervention in the market which would distort competition. British Airways believes that any efforts to support the development of regional airports must not extend to distortive and unfair fiscal incentives, such as variable Air Passenger Duty or the subversion of the economic regulation system to deliver Government airport policy outcomes.

2.7 While regional airports fulfill an important role in the UK aviation economy, British Airways does not believe that regional airports can ever be an alternative to provision of effective hub airport capacity serving London and the South East. Anecdotal evidence from international air service agreement negotiations in recent years suggest that many foreign airlines have no interest in accessing regional airports as an alternative to access to Heathrow.

(c) How can surface access to airports be improved?

2.8 While substantial progress has been made in recent years to increase the share of passengers reaching airports by public transport, British Airways believes there is significant scope to improve both the physical infrastructure and the policy development process supporting surface access to airports. We are encouraged by the Department for Transport’s announcement of a review of rail access to airports, and that the focus of that review will be on the ability of rail to provide improved access to airports. However, for the avoidance of doubt, British Airways does not believe there is any merit in using rail to provide connections between airports as a solution to the current shortage of hub airport capacity.

2.9 British Airways believes that the Government should prioritise infrastructure projects which deliver sustainable surface access improvements, such as the proposal for western rail access to Heathrow which the Government currently supports. However, there is also a need for greater integration of policy making within the Department for Transport and other Government departments and, crucially, for other infrastructure providers, especially Network Rail, to make access to airports a strategic priority. In particular, British Airways is concerned that the proposed route for High Speed Two does not go via Heathrow, inclusion of which would deliver an integrated air-rail transport solution. British Airways believes this is an example of a lack of integrated thinking in policy making. In general consideration should also be given to measures which ensure that public transport providers serve airports during full airport opening hours, and encouraging cooperation between airport operators and public transport providers to develop appropriate fare structures and promotions to encourage sustainable journey patterns.

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?

3.1 British Airways recognises that aviation has localised environmental impacts, and that noise is the most immediate concern for many residents around airports. However, British Airways believes it is imperative that objectives to reduce aircraft noise are set in the context of the other environmental impacts of aviation, reflecting the trade-offs which exist between, for example, carbon and noise impacts. It is important to note that the noise performance of the aviation industry is continuously improving. The industry has delivered a 65% reduction in perceived noise around airports since 1960s and is on target achieve a further 65% reduction by 2050 (compared to 2000). Noise contours using the standard 57db measure of aircraft noise were reduced by 52% around Heathrow airport between 1991 and 2009.

3.2 The Government’s proposals as set out in its draft Aviation Policy Framework contain a number of suggestions to improve the management of the impact of aviation noise. While British Airways is broadly supportive of the Government’s overall objective to “limit and where possible reduce the number of people in the UK significantly affected by aircraft noise”, it is important that this objective is balanced against the objective to maximise the economic benefits of aviation. In balancing these sometimes competing objectives, it should be incumbent on the Government to ensure that the benefits of continued improvement in noise performance should be shared between local communities and growth in the aviation sector. Government should also prevent future population encroachment around airports where capacity growth is permitted, reflecting the fact that government policy has seen central decisions overrule local planning restrictions, resulting in more than 13,000 additional homes being built within the 2009 57db noise contour between 1991 and 2009.

(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?

3.3 British Airways welcomes the Government’s recognition that carbon emissions are best tackled through coordinated, global action. The aviation industry has adopted a global target to reduce net emissions from international aviation by 50% by 2050, relative to 2005 levels. British Airways is playing a leading role, through industry groups such as Sustainable Aviation, in identifying a pathway towards the achievement of this goal. Carbon trading is by far the most effective economic instrument to reduce emissions in the aviation sector, reflecting the global nature of the industry. A well designed EU Emissions Trading System which does not distort air transport markets and avoids international disputes can be a first step towards the adoption of a global emissions trading system. However, the scope of the existing EU ETS should be amended from its current form in order to mitigate the risks of retaliatory measures, non-compliance, and competitive distortions, in advance of the adoption of a global system.

3.4 Unilateral, UK-level measures to address international aviation emissions are inappropriate and ineffective, and are likely to create competitive distortions which do not serve the interests of UK consumers or businesses. Therefore while British Airways accepts the recommendation of the Committee on Climate Change (CCC) to include emissions from international aviation and shipping in UK carbon budgets for accounting purposes, we also agree with the CCC that there is no place for national level targets for carbon emissions from UK aviation.

3.5 Recent and future developments in aircraft and engine technology, and the development of sustainable biofuels, and improvements in air traffic management, all have the potential to play a major role in enabling the sustainable growth of aviation. British Airways is a leading participant in efforts to develop sustainable biofuels for aviation through our partnership with Solena to produce biojet fuel from industrial, agricultural and domestic waste, with the potential to bring significant economic, as well as environmental, benefits to the UK. However, in order to fully exploit the potential of biofuel for aviation, there must be a level playing of incentives with ground transport fuels, which could be achieved through the Renewable Energy Directive, as other EU Member States have allowed aviation biofuels to become eligible for Renewable Transport Fuel Certificates.

(c) What is the relationship between the Government’s strategy and EU aviation policies

3.4 The Government’s aviation policies are broadly consistent with the EU’s aviation policies. The UK Government plays a leading role in the development of EU policy on the integration of airspace management and planning, and has been a leading force in the integration and liberalisation of European aviation. However, in the absence of a clearly articulated strategy for UK aviation, it is premature to judge the consistency of the UK’s approach with the full range of EU aviation policies.

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?

4.1 We need to adapt to a world in which the centre of gravity is moving from West to East. If we do not have a hub airport that links us directly to world growth we will suffer for it. The case for extra capacity is overwhelming. There are already 21 emerging market destinations that are served from European hubs but not from the UK. The government needs to create economic opportunity through the aviation industry, not stifle it.

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

4.2 British Airways believes that the independent Commission to be chaired by Sir Howard Davies should undertake a thorough, objective assessment of all the various options, including thorough and reliable assessments of the financial and economic costs of such schemes. British Airways believes that the Commission should not be prevented from considering any options as a result of the adoption of environmental or other restrictions in the Government’s Aviation Policy Framework.

29 October 2012