Transport CommitteeWritten evidence from Peel Airports Limited (PAL) (AS 90)

Peel Airports Limited (PAL) operates two regional airports: Robin Hood Doncaster Sheffield Airport (RHADS) and Liverpool John Lennon Airport (LJLA).

Introduction

PAL welcomes this call for evidence and supports the TRANSEC inquiry looking at the proposed Aviation Policy Framework published by the Government in July 2012.

PAL strongly agrees with TRANSEC in believing that a strategy for aviation policy (including aviation capacity) must not be delayed until 2015 and it should remain high on the political agenda during the current Government's term.

This response document comprises PAL's position on the five main areas:

1.Aviation Policy Framework (APF) proposal.

2.Air Connectivity and the benefits of aviation to the UK economy.

3.Existing and future aviation capacity requirements.

4.Aviation taxation.

5.Aviation and environment.

We have provided our comments and views on the above areas and highlighted specific issues which are of most importance to our regional airports and the regions they serve.

We have also attached two documents which provide further details on our position on UK aviation's competitiveness, the impact of APD on our regional airports and lack of a coherent national aviation policy:

1.PAL formal response to the All Party Parliamentary Group on Aviation (APPG)—Inquiry into "Maintaining the Competitiveness of the UK in Global Aviation", May, 2012;

2.All Party Parliamentary Group for Aviation—Final Report, August 2012.

Inquiry into "Aviation Policy and Air Passenger Duty", House of Commons

1. Aviation Policy Framework (APF) Proposal

Before we comment on the proposed aviation policy framework, we would like to re-visit the key message set out in the current AWP2003 policy produced by the previous Government. The policy document sets out a clear 30 year strategy by stating:

"…It is essential that we plan ahead now; our future prosperity depends on it!"

This is a powerful statement that reflected the vision of the previous Government and provided the industry with a clear direction and support for growth and economic prosperity the industry was empowered to deliver.

This visionary strategy has enabled a successful revival of regional airports across the UK and delivered a boost to regional economies, improved regional connectivity, supported inward investment and grown the tourism economy.

We have provided more details on the positive effects of this aviation strategy on the regions served by LJLA and RHADS in section 2 of this document.

APF Proposal

Following a lengthy delay in formulating its aviation policy proposal the Government published its APF proposal and commenced consulting on it in July 2012.

We believe that this delay is an indication of the Government's continued lack of vision and clear strategy with regard to UK aviation policy, combined with a lack of commitment to the sector to ensure long term support to the sector.

The current proposal does not provide a coherent long term strategy nor does it place the industry at the heart of the Government's drive for economic recovery and rebalancing of the economy.

Improved international connectivity, regional connectivity in particular, enables our economy to compete more successfully in the international markets. It delivers inward investment and grows the tourism economy.

The proposal skirts around the two key issues: aviation capacity and the declining competitiveness of our regional airports. Our competitiveness is of critical importance for the connectivity, economic performance of the regions served by our airports and rebalancing of the economy—the concept the government has frequently highlighted as the key priority.

Therefore, we believe that the proposal fails to place sufficient weighting on the importance of connectivity to the UK economy and especially to the UK's regions' connectivity which is declining fast due to excessive aviation taxation and its suppression of demand. This is even more evident in the North of the country, served by our airports, which is a price sensitive market.

The policy proposal is silent in respect of the two major aviation policy matters which continue to burden the sector:

Rapid rise in external cost to our airports and continued subsidy of other transport modes such as rail and public transport (direct result of recent Government policies).

Continued rise in aviation taxation—APD (direct result of the Treasury's continued short sighted approach toward the sector):

We continue hearing the same excuse from the DfT with regard to the APD issue—"…This is the matter for the Treasury to consider etc…". This is not the right way forward especially now when the Government is dealing with rebalancing the economy and working on developing the UK's national aviation policy.

There is a significant body of evidence1 which indicates that APD does have an effect on the industry and the economy. APD is of national importance and should be treated as such.

We believe that there is an urgent need for a joined up—cross departmental approach, where the Treasury, the DfT and the industry would work together on a quantitative study looking at the impact of aviation taxation on the growth of the industry, its ability to deliver international connectivity and its ability to drive the economic recovery.

The policy proposal does not explore nor make any references to such an approach.

We feel that the main thrust of the proposed policy focuses on mitigating aviation environmental and noise impacts, which are important elements in their own right but not the most critical factors that determine the direction and the shape of national aviation policy.

PAL shares the industry's position—the industry is unanimous and confident that the future growth can be delivered in a sustainable and environmentally responsible manner as set out in the Sustainable Aviation's "CO2 Road Map".

There are well established and clear EU Regulations and Directives which provide guidance on what is required from the industry in respect of mitigating its impact on the environment (the EU ETS and EU Noise Directive).

The sector's environmental and noise impacts are global issues and not solely UK specific issues.

There is no need for unilateral implementation of even more stringent measures in the UK—the existing EU measures, which the UK industry is compliant with, are sufficient in tackling the sector's future environmental and noise impact on environment.

Otherwise, new unilateral measures would only further erode the already compromised competitiveness of our regional airports and the UK industry as a whole.

In respect of future growth—we do not support the proposed policy which places too much importance and emphasis on the growth of UK's major airports only. UK regional airports have demonstrated over the last decade or so that they are essential for regional connectivity and regional growth.

Our airports are at the heart of the rebalancing of the UK's economy concept. We would like to see this approach incorporated into the UK's national aviation policy. We have significant potential to deliver much more if the right environment is created by the Government.

The High Speed (HS2) rail plan has been given much attention and support by the Government. The future high speed rail system could deliver public benefits in the long-term; however it is not a panacea for all of the UK's future transport problems.

The high speed concept alone should not be presented as a direct substitute for all domestic and short haul air travel in the UK—we believe that it should serve as a complement to air travel; both transport modes could serve as building blocks of the national integrated transport system in the UK. Favouring one at the expense of the other is not the right way forward—consumers need the benefits delivered by competition and more travel choice.

We believe that the Government should improve overall UK connectivity and work hard on integrating both air transport and rail network into a modern system which delivers benefits to the public in terms of time savings and ease of transfer from one transport mode to another.

Many European countries have already successfully integrated their air, rail and bus transport modes delivering benefit for consumers.

2. Air Connectivity and the Benefits of Aviation to the UK Economy

In 2011, a study by Oxford Economics, found that the aviation sector itself contributes almost £50 billion to the UK economy.

This represents almost 4% of the UK's GDP value. The total value is made up of direct flying activity, aviation's supply chain, spending by aviation sector employees and aviation's boosting of inbound tourism.

The study also indicated that the sector is a major employer supporting almost one million jobs.

Legend:

"Direct" = In Aviation Sector.
"Indirect" = In Aviation's Supply Chain.
"Induced" = Supported by Aviation Employees' Spending.

In terms of economic contribution to public finances the industry contributes in excess of £9bn to the Treasury in tax (£6bn in general tax and £3bn in APD tax).

Since the recession began in 2008, UK connectivity has declined by 5%, whereas Germany's has increased by 4.3% and France's by 3.4%.

These figures suggest that the UK is losing ground in comparison with its direct competitors for international connectivity.

Oxford Economics2 found that in proportion to the size of its economy, the UK does not rank as highly as it potentially could on air connectivity.

Direct international connectivity has a two-fold importance:

1.It increases the degree of connectivity; and

2.It improves passenger convenience and ease of travel.

The results of the study prepared by the Frontier Economics (2011) indicate that UK businesses trade 20 times as much with emerging markets that have a direct daily flight to the UK as they do with those countries that do not.

The lack of direct flights from the UK regions (including the regions served by RHADS and LJLA) to these markets may already be costing the economy over £1.2bn per annum—because trade goes to better connected countries.

The value of this missed opportunity to the UK economy over the next ten years could be as much as £14bn.

Tourism economy is important for regional economic performance. Overseas visitors arriving by air contribute more to the UK economy.

Source: ONS

As previously mentioned, regional connectivity is the key to unlocking regional economies' potential for growth, inward investment and tourism economy.

LJLA—Liverpool City Region

Liverpool City Region's cultural and tourism offer is the strongest outside London, boosted significantly in recent years through major public and private sector investment3.

The value of the visitor economy4 to the region in terms of output figures is more than impressive:

Value of the City Region visitor economy = £3.1billion.

Jobs already supported by the visitor economy = 43,000 jobs

Annual visits to the Liverpool City Region = 55 million visits.

Liverpool is in the top 10 of all UK towns or cities visited by overseas visitors and is now placed 5th.

LJLA plays an important role in developing the regions international connectivity, inward investment and tourism economy.

There is a correlation between the growth of traffic at the airport, growth in the number of overseas visitors and the regions GVA growth.

We would like to draw your attention to the findings and recommendations of the recently published independent study5 lead by Sir Terry Leahy and the RT Hon the Lord Heseltine. The study concludes:

"…Liverpool is not the source of despair it once was; since 2000, Liverpool's economy has grown faster than that of the UK…this gives us the confidence to look for ways to build on existing achievements…LJLA needs to further develop its global connectivity…Liverpool needs better direct links to international hubs…it should continue to seek direct New York flights…".

A wrong aviation policy which places most emphasis on London Airports and several major UK airports whilst failing to support regional airports growth could have a negative knock on effect on the UK regions—resulting in reduced regional connectivity; leading to a decline in regional economic output, lack of inward investment and decline in the number of overseas visitors.

RHADS—Doncaster Sheffield City Region

On 28 April 2005, the first ever commercial services commenced on the site of the former Royal Air Force Finningley aerodrome. The annual passenger throughput has reached one million passengers per annum. The jewel in RHADS crown is its runway—one of the longest runways in the UK. The airport is truly an international gateway into and from the UK through the Yorkshire and Humber Region and whilst the Region is proud of having such an airport at its doorstep , RHADS should be regarded as a UK national asset delivering regional connectivity, employment, inward investment, tourism economy etc.

In January 2012, RHADS was crowned the best in the country by "Which?" members following a new survey carried out by "Which? Travel". The airport received the highest customer score of 80% in the survey, which asked 8,012 members to rate their satisfaction with and likelihood to recommend a UK airport they had used in the previous 12 months. RHADS picked up an impressive "5 Stars" award for the airport environment. The airport topped the group of smaller airports with fewer than 4 million passengers per year.

The airport has both the terminal capacity and one of the longest runways in the UK capable of accommodating largest passenger and cargo aircraft in the world. The airport has significant potential to improve better serve the region and boost the economy. Upon the completion of the FARRRS project in 2014—the project which will connect motorway users directly with the airport via a dual carriageway, will deliver further benefits to the region and the community served by the airport.

However, RHADS shares a similar barrier to future growth as many other regional airports—its growth is affected by the effect of APD which places the airport at a competitive disadvantage. The North of England is a price sensitive market— adding APD on top of airline fares makes air travel unaffordable for many in the region. Business located in the regions are also affected as they prefer to use their local airport to fly from however as APD continues to act as a barrier to growth thus undermines our potential to attract airlines to deliver the right choice of scheduled services from RHADS to international business markets.

Moreover, both LJLA and RHADS are privately owned airports as the majority of the UK airports are, and as such receive no public funding aimed at developing airports' infrastructure or operational costs unlike other transport sectors in the UK which receive government subsidy.

We touch upon negative effects of government subsidies on competition amongst the transport modes in the UK in more detail in the section 4 of this response document.

3. Existing and Future Aviation Capacity Requirements

We believe that a portion of any future new hub capacity (whether this is provided at London Heathrow, a new UK Hub airport or elsewhere) must be ring-fenced for regional services thus ensuring UK regions access to international markets.

Furthermore, until additional hub airport capacity in the UK becomes available, our regional airports have ample capacity in terms of runway and terminal capacity to accommodate future growth in travel demand and develop regional connectivity and thus stimulate and open up the regions they serve for much needed economic growth. Our airports have untapped potential to kick-start the recovery.

We believe that a set of measures outlined in the APF (fifth freedom rights, PSO services, ADF, further liberalisation of air service rights etc.,) are tools aimed at opening up the UK market and assisting UK airports in developing new services—however in reality we cannot see much benefit from the proposed measures—these measures are nothing new; they have been around for over two decades and have failed to deliver any significant benefits to our regional airports.

We have found it very difficult to apply these measures in general due to the existence of very restrictive EU/UK legislation on competition, state aid etc.

We believe that the key to opening up the UK market and improving the competitiveness of our regional airports revolves around the issue of APD.

APD continues to hinder the growth and introduction of new international services from our airports. This in turn has a negative knock-on effect on regional connectivity and regional economies.

Ample capacity is available at our airports—this is a valuable asset of national importance—we alone are unable to exploit our own potential to the full.

The key to unlocking this extremely valuable capacity locked in our regional airports will remain out of our reach for as long as there is the lack of cross departmental approach in tackling APD.

We strongly believe that the Treasury, the DfT and the industry must work together on assessing the impact of aviation taxation on the growth of the industry, its ability to deliver international connectivity and its ability to drive the economic recovery especially from regional airports' perspective.

4. Aviation Taxation—Air Passenger Duty (APD)

The APD tax was introduced in 1994 and has been increased significantly over the recent years to the stage where the UK levies the highest aviation tax of any country in the world.

Since, 2007 when the APD was doubled, the duty has seen a rise of a staggering 160% (economy travel class) and 360% (non-economy travel class) whilst the cumulative rise in inflation over the same period was only 17%.

According to the Government's budget projection, the rate of APD is forecast to rise even further and generate over £4bn in revenues to the Treasury.

The level of APD has reached a level that is detrimental to the UK economy, regional economy and UK's international connectivity—APD acts as a brake on the sector's ability to drive connectivity, stimulate growth and create new employment.

APD and UK Aviation Policy are under the jurisdiction of different Ministers which greatly impairs the development of a cohesive policy for the sector.

PAL believes that the UK regions have been placed at a significant competitive disadvantage to other European and global markets since the absence of an equivalent tax makes these markets more attractive for airlines to grow their business. It presents a major barrier to inward business and leisure travel to the UK.

The Treasury believes that the industry has an advantage over other transport modes in the UK since it pays no VAT on aviation fuel—however we should point out that International agreements (the IATA Convention from 1944) prevent any country from imposing any fuel duty on aviation.

However, this real benefit of no VAT on aviation fuel should be assessed alongside the benefits that other passenger transport sectors receive from the Government in order to provide an accurate assessment as to whether the UK aviation sector has any competitive advantage over other transport modes.

For example, the ferry industry does not pay any fuel duty whilst until recently 80% of the fuel tax paid by bus operators was refunded through the Fuel Duty Rebate mechanism (replaced by the Bus Service Operator Grant).

In addition there is no passenger duty payable by UK cruise passengers departing from UK ports which is even more interesting since shipping generates more CO2 emissions than aviation.

Moreover, other forms of mass public transport are subsidised by the taxpayer, when the aviation sector receives no such subsidies (excluding a small number of PSO air services in the Highlands and Islands in Scotland).

For instance, in 2010/11 alone, the rail sector received almost £4bn of taxpayers' money/annum6 whilst bus and coach company subsidies in England were granted circa £2.4bn7.

Therefore, the airport infrastructure in the UK is paid for exclusively by the aviation sector alone without receiving any taxpayers' money.

It is evident that the sector is at a considerable disadvantage to other transport modes in the UK which do not pay a departure tax per passenger journey whether it is a domestic or international journey.

Any further rise in the level of APD tax will have a lesser effect on the airports in the South East of the country but will affect most our regional airports which serve the North England market, a price sensitive market, and where the economic viability of routes is lower due to smaller markets, lower purchase power, and fewer feeder routes.

The Government states that much effort is being paced in measures to rebalance the UK economy and spread aviation demand away from the congested South East—further rise in APD will counteract this policy.

Based on our discussions and feedback from airlines, we strongly believe that APD tax is acting as a disincentive for airlines to grow services from regional airports.

Passenger traffic at UK regional airports such as LPL and DSA is mostly generated by low cost carriers such as Ryanair, easyjet, Wizz Air and ThomsonFly. APD can account for over 30% of their average short haul fare; for example Ryanair's average fare8 is £44.00 inclusive of £13.00 APD per departing passenger. Therefore carriers look at continental Europe for growth opportunities.

APD negatively impacts regional economies, reduces regions' connectivity, affects the inward tourism economy and weakens the UK economy.

Many European countries, including Belgium, The Netherlands, Spain, Portugal, Belgium, Denmark etc., have abandoned their aviation taxes, due to the negative effect it had on their economies and especially their visitor economy.

As a result of this, UK and foreign passengers travelling from UK airports are taxed twice, ie firstly for APD and secondly for ETS. No other country in Europe has implemented such a tax burden on its aviation industry.

Further evidence indicates that APD damages the UK's connectivity and airlines' ability to operate business and leisure routes competitively. The doubling of the APD rates in 2007 and subsequent rises in APD have significantly contributed to a number of key routes being lost at UK airports. The most recent example of this can be seen at LPL and Edinburgh Airports where Ryanair decided to significantly reduce their flying programmes in 2012 due to the rise in APD. The loss of KLM's services at LPL can be attributed to a combined effect of APD and a weak economy on connecting long haul travel demand.

As mentioned a number of European countries have already abolished or are in the process of abolishing their own aviation tax due to the damaging impact the tax has on traffic, inward investment, tourist economy and national economy as a whole.

One of the most striking examples is the case of the aviation tax in the Netherlands.

In 2008, The Dutch government introduced its own air passenger tax for all departing passengers travelling from the Dutch airports. Initially, the Dutch Government was hoping to generate approximately €350 million per annum in tax take from the industry. However, following the introduction of the tax, the Dutch airports, especially Amsterdam Schiphol Airport, saw a significant fall in passenger numbers. In addition the number of Dutch nationals using the airports across the border in Germany and Belgium rose dramatically.

The tax was abolished in January 2010. It is estimated that the Dutch Government had cost the national economy in the region of €1.3 billion in lost revenue9.

There are many reports10, produced recently, which focused on the economic impact of the UK aviation sector on the national economy, UK international connectivity, the impact of APD on the UK aviation sector and the UK economy. They independently arrive at the same conclusion: APD has a direct negative effect on the industry and the economy.

If Government continues to increase APD by 5% annually, according to the British Chamber of Commerce, the loss to the national economy could be as much as £3 billion by 2020 and a staggering £100 billion by 2030.

The Oxford Economics Report (March 2012), commissioned by the World Travel & Tourism Council, provided strong evidence that removing APD would result in an immediate increase of up to £4.2 billion in GDP and the creation of up to 91,000 new jobs.

In August 2012, the All Party Parliamentary Group (APPG) for Aviation released the findings11 of its inquiry into Aviation Policy and Air passenger Duty. In its report to the Government, the APPG concluded:

"…Air Passenger duty and Aviation policy are under the jurisdiction of different Ministers. This inevitably impairs the development of a cohesive policy for the sector…evidence from experience in other European countries and indications of changing patterns of traffic, particularly from UK regions, appears to confirm the adverse impact of imposing Air Passenger Duty (APD), particularly at higher rates in the UK. The Government should initiate studies to quantify the full impact of APD on UK competitiveness and its taxation policy…"

Therefore, we fully support the APPG findings and support the calls for an independent analysis of the economic impact of APD on the industry and the economy. We are confident that this report would re-confirm the results presented in the mentioned studies and put the Government on the spot to re-think its position on APD in the interest of regional economies and the UK plc.

5. Aviation and Environment

As mentioned under the point 1—PAL shares the industry's position on this matter—we are confident that the future growth can be delivered in a sustainable and environmentally responsible manner as set out in the Sustainable Aviation's "CO₂ Road Map".

Despite popular misconceptions, aviation is not the most significant contributor to climate change; in fact it is relatively small. However due to its high public profile (air travel is highly visual transport mode) there is a widespread public perception that the emissions generated by the sector are much greater than they actually are.

For example, according to the International Transport Forum 2010 report, the global aviation industry contributes around 2% of the total man-made global carbon emissions.

According to the same study, other sectors' carbon emissions contributions are as follows:

Energy Supply sector 28.4%,

Industry 19.5%,

Fires and forest clearing 14.3%,

Agriculture 12%,

Road Transport 11%,

Residential 8.1%,

Global Aviation 2%, and

International shipping 1.2% etc.

Similarly, according to the National Atmospheric Emissions Inventory Document 2009, aviation emissions in the UK account for 6% of Greenhouse Gas emissions. This is much lower than the emissions generated by other sectors:

Energy Supply 32%;

Road Transport 19%;

Business 14%;

Residential 13%;

Agriculture 8%; and

Aviation 6%.

In 2008 the Department for Transport stated that the impact of the UK aviation sector's emissions, including noise, was £1.8bn.

In 2012–13, Air Passenger Duty (APD) is set to generate approximately £3bn revenue to the Government. If we take into account a slight increase in the industry's environmental impact (emissions and noise combined), than a simple calculation based on the above figures indicates that the industry more than covers its costs.

Aviation's entry into the EU ETS took effect from January 2012. This means that all flights arriving and departing the EU airports have to comply with the ETS scheme.

The ETS mechanism sets a cap on the total aviation emissions and gives each carrier an emissions "allowance". It is a carrier's responsibility to remain within its allowance. Therefore, the carrier has several options at its disposal to ensure its compliance:

Reduce emissions to meet its allowance.

Trade allowances (ie, buy allowances from those who have surplus).

Invest into Certified Emission Reductions or Emission Reduction Units.

The ETS mechanism is enforced by Member States and the UK has brought the industry within the ETS regime.

Since both ETS and APD are applied and levied onto departing passengers in the UK, our passengers are taxed twice compared to only once (ETS duty) in the rest of the EU.

The current double taxation approach applied by the UK Government further disadvantages our regional airports and makes our job in attracting new airlines to open up new services from PAL airports even harder.

It is not a surprise to see airlines moving their aircraft from UK regional airports across to the mainland EU where they can operate free of this unfair double tax.

The environmental impact of aviation is a global issue which requires a global resolution.

Any unilateral measures brought by the UK Government alone will further damage UK aviation industry, put the viability of regional airports at risk and affect recovery of the national economy.

Summary

We believe that the current APF proposal fails to deliver a coherent national aviation policy—it is a reflection of the Government's unwillingness to deal with the airport capacity issue until after the general elections in 2015.

Therefore, we support your initiative for an urgent review of the proposed APF policy. This review should also look at both UK airport capacity and aviation taxation. These factors are the most important factors that will impact, define and shape of our future national aviation strategy.

PAL believes that there should be no further delays in adopting a joined up approach from the DfT, the HM Treasury and the industry on working together on a formal qualitative/quantitative assessment of the APD impact the industry and national economy.

The importance of the outcome of such analysis is significant and could determine the direction of the future aviation policy in the UK. It could determine the prospects of the industry to either grow sustainably delivering international connectivity, jobs and prosperity to our regions and the UK as a whole or not.

The UK's regional connectivity is in decline—if we fail to act now, we could potentially see detrimental long lasting effects on our regions and airports such as PAL airports—the Government must avoid building its future aviation policy solely around the South East and the future of London Airports.

PAL would like to see a National Aviation Policy—a coherent long term strategy which would address the future of the sector for the entire UK; there must be a shift in focus from London Heathrow/Hub airport issue to UK regions—regional economies hold the key to a successful rebalancing of the national economy and future prosperity of the UK as a whole.

PAL will continue working with the AOA and the industry on ensuring the above issues remain high on the political agenda during the current Government's term and its successor.

22 October 2012