Transport CommitteeWritten evidence from London First (AS 79)
1. London First is a business membership organisation with a mission to make London the best city in the world in which to do business. We do this by mobilising the experience, expertise and enthusiasm of the private sector to develop practical solutions to the challenges facing London. London First delivers its activities with the support of the capital’s major businesses in key sectors such as finance, professional services, property, transport and infrastructure, ICT, creative industries, hospitality and retail.
2. We welcome the chance to address some of the questions posed by the inquiry. Our submission is based on the conclusions of the Commission London First established to examine—in the round—the capacity and quality of London’s transport infrastructure links with the rest of the UK and the wider world. Its report London, Britain and the world: Transport links for economic growth, published in February 2012, made recommendations for the short, medium and longer term to Government and others. It can be found at www.londonfirst.co.uk.
What should be the objectives of Government policy on aviation?
3. The Government acknowledges that securing Britain’s international connectivity is fundamental to expanding trade, attracting investment and generating economic activity that will create jobs. London is Britain’s principal gateway to talent and capital from across the world and the most economically vigorous region of the UK. Its unique concentration of economic activity is at the heart of the country’s economy. London is a major trader with the world, home to the European headquarters of one-third of the Fortune Global 500 companies and a leading European destination for foreign direct investment (FDI),1 attracting a fifth of all European FDI. London’s trade and commerce are driven by international business and are dominated by the export of services. The UK is the world’s second-largest exporter of services after the US.2 London accounts for over a third of these exports and in financial services it is a global leader.
4. The UK’s ability to remain a leading centre for world trade and commerce will increasingly depend on securing new links with emerging markets while maintaining traditionally strong links with domestic, European and US markets. These links will be critical to London’s ability to support and spearhead the UK’s economic growth. The IMF predicts that over the next decade approximately half of all the economic growth in the world will be in the eight largest emerging market countries (including China, Indonesia, Korea, Russia and Brazil).3 Emerging market economies are forecast to overtake the advanced economies’ share of global GDP by around 2024.4 With much of Europe facing a prolonged period of low growth, business is increasingly looking to these new markets for opportunities to expand.
5. The UK is already at a competitive disadvantage. London has fewer weekly flights than its European rivals5 to half of the emerging market economies, and seven of the eight growth economies identified by the IMF. It has no direct air links to the emerging economies of Chile, Colombia, Peru, Venezuela, Indonesia and the Philippines—links that other European cities possess. And while Heathrow—the UK’s only international hub airport—supports frequent services to established US and European markets, the absence of spare capacity constrains its ability to offer the range of international long-haul destinations to the fastest growing economies that its hub rivals offer.
6. Demand for flights in the UK is forecast to double by 2050, while demand for business flights is forecast to grow 80% by 2030.6 All of London’s airports7 are forecast by Government to be full by 2030. And of course, Heathrow’s runways are operating at permitted capacity limits now. We believe that without new runway capacity in London and the South East—and above all new hub capacity—London’s ability to compete for trade, talent and investment, and to support the UK’s growth, will erode over the next decade and beyond. We believe therefore that one of the principal objectives of Government aviation policy must be to neutralise this threat in the short, medium and long term. All options to do so should be rigorously examined, with the best available evidence of costs and benefits transparently evaluated.
7. We welcome the fact the Government has begun to prioritise transport infrastructure most likely to underpin economic growth by incorporating analysis of wider economic benefits. A new aviation policy should be informed by a similar understanding of which new air transport infrastructure is most likely to yield the greatest contribution to sustainable economic growth. There are of course other objectives for transport policy beyond maximising economic growth. They include carbon reduction, which will be spurred by consistently pricing carbon across all investment decisions, and reducing the local environmental impact of flights (and the surface transport which services them). Whether monetised or not, these should be inputs to a credible, transparent and consistently applied aviation policy.
How should we make the best use of existing aviation capacity?
8. In principle there are a number of ways in which Government could intervene to redistribute the use of existing airport capacity. The scope for such action is limited by a mix of international treaties and EU-wide slot regulations and property rights, but in principle the Government has some policy levers to change the incentives at Heathrow, most obviously the regulatory regime (which sets landing charges at Heathrow), and the tax regime on air journeys. Either or both of these could in principle be used to encourage flights to certain destinations at the expense of others. However, we are sceptical that such an approach would deliver acceptable and efficient outcomes.
9. Greater intervention of this sort is fraught with practical difficulties, and any attempt to direct the utilisation of scarce capacity requires the Government to interpose its own views on the relative value of alternative slot usages in place of the current market-based approach. The current mismatch between supply and demand is already creating distortions. Intervention will create further, unanticipated distortions and gaming will result. And as demand grows, these distortions will increase. Critically, such an approach would serve as a diversion from the real need: more runway capacity to provide greater connectivity.
10. Absent such an approach, we think there are three principal means of making best use of existing capacity. The first is the only measure capable of bringing an increase in hub capacity in the short to medium term, and is based on enabling Heathrow to use its existing runways more efficiently by allowing planes to land and take-off concurrently on both runways more frequently than is currently permitted. Freedom to operate in this way—under certain circumstances—is currently in place at certain times of day and could be applied more broadly to increase runway capacity by up to 15%.8 We believe this capacity should be used to cut flight delays, delivering greater resilience so the airport is able to recover more quickly from any delays. The option thereafter to provide new services should be assessed once the results of trials now running at Heathrow are appraised.
11. The principal objection to this operating flexibility—whether for resilience or further services—is that it would change and increase the distribution of noise for surrounding communities. Its introduction must, therefore, be accompanied by credible, deliverable and independently enforced measures to set noise limits and compensate for the local impact of breaches to them. This may require in parallel sharper penalties and incentives on the operator and airlines to deliver sustainable reductions in noise from aircraft using Heathrow.
12. The second means of making best use of existing capacity is based on the Government’s support for “competition as an effective way to meet the interests of air passengers”.9 We believe that deregulation of London’s two largest point-to-point airports (Gatwick and Stansted) would give these airports the flexibility required to compete more effectively with each other, Heathrow and other international airports, so as to be able to attract the widest range of airlines and flights, as well as more flights to growth markets. The rationale for continued economic regulation clearly rests on the three tests set out in the Civil Aviation Bill currently before parliament. We look forward to the conclusion of the this work, and in particular the results of the Civil Aviation Authority’s market power review, as the prima facie case for removing Gatwick and Stansted from price regulation in the short term appears to us to be strong. Economic regulation should have the flexibility to respond to changes in the market as investment decisions evolve; and should increasingly rely on competitive pressures to restrain prices.
13. Finally, we believe a coherent and sustained strategy to improve rail access to our major airports is required. The Government acknowledges that improving rail access is an important means of encouraging airlines to airports with spare capacity; and we believe better access would lower one of the barriers to greater competition. In 2006 the Eddington Study highlighted, amongst other things, the urgent need to improve the UK’s key international gateways with better road and rail access.10 It is hard to avoid the conclusion that transport policy has paid insufficient attention to the need for better integration between modes. The Government should enshrine the opportunities for Gatwick presented both by Thameslink’s upgrade and the new combined Thameslink franchise.
What constraints are there on increasing UK aviation capacity?
14. All options for new capacity present substantial challenges in terms of their financing, funding and environmental impact, and all will require political will. We welcome the Davies Commission, and the opportunity it presents to establish sustainable, cross-party consensus on its recommendations.
15. In global environmental terms, all options have the potential to lead to an increase in carbon emissions. While unconstrained demand for flights in the UK is forecast to double by 2050, in reality this will be constrained. The independent Committee on Climate Change has concluded that a 55% growth in flights by 2050 is compatible with achieving overall national carbon reduction targets. This means a maximum of 3.4 million flights11 a year, up from 2.1 million today. In crude terms, if demand for these extra flights were evenly distributed across all airports in the UK, London’s five airports could cater for around 1.5 million Air Traffic Movements (ATMs) by 2050 within national carbon limits. This would require a third runway at Heathrow and one new runway at a point to point airport—but no more. We believe that a new runway at the hub and another runway at a point-to-point airport in the London area could enable London to increase its connectivity at least until 2050, to the most stretching forecasts of demand, and consistent with our climate change obligations.
16. As mentioned above, the principal objective to further flights is at a local environmental level and above all, as a result of noise. We believe that permission for more flights should be accompanied by limits on noise levels. The precise levels are a matter for detailed analysis and public policy, but if local communities are to have confidence that the limits will be maintained, we believe they need to be subject to independent enforcement. Technological advances offer scope for improvements, but a credible, independent and transparent mechanism must be put in place for limiting and monitoring noise and air pollution. We believe this requires a truly independent noise regulator with enforcement powers—vital to give public confidence.
19 October 2012
References
1 Ernst & Young European Investment Monitor 2009.
2 UK Trade Performance Over the Past Years—Trade and Investment Analytical Papers, BIS/DFID, 2011.
3 Brazil, Russia, India, China, Mexico, Korea, Turkey, Indonesia. World Economic Outlook—Slowing Growth, Rising Risks, IMF, September 2011.
4 Oxford Economics research, 2011
5 Paris, Frankfurt, Amsterdam, Madrid and Munich
6 UK Aviation Forecasts, DfT, August 2011
7 Heathrow, Gatwick, Stansted, Luton, London City
8 With sufficient associated infrastructure, such as parking stands
9 Draft Aviation Policy Framework, Department for Transport, July 2012
10 The Eddington Transport Study, HM Treasury/DfT, December 2006.
11 Air Traffic Movements.