UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 765-iii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Transport Committee

Aviation Strategy

Tuesday 4 December 2012

Willie Walsh

Evidence heard in Public Questions 239 - 289

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Oral Evidence

Taken before the Transport Committee

on Tuesday 4 December 2012

Members present:

Mrs Louise Ellman (Chair)

Kwasi Kwarteng

Karen Lumley

Lucy Powell

Iain Stewart

________________

Examination of Witness

Witness: Willie Walsh, Chief Executive Officer, British Airways and International Airlines Group, gave evidence.

Chair: Good afternoon and welcome to the Transport Select Committee. Could you please give us your name and organisation?

Willie Walsh: Willie Walsh, Chief Executive, International Airlines Group.

Q239 Chair: Mr Walsh, discussions about aviation and the issue of the need for increased capacity have been going on for a long time. Is there any new ingredient in the current debate?

Willie Walsh: The decision of the Government to establish the Davies Commission has been seen by some, and maybe by many, as a step in the right direction. Personally I am not optimistic. If you look at the history of these Commissions, we had the Roskill Commission in 1968, with the report in 1971. The report probably sits somewhere and nobody has done anything about it.

My own view is that the issue is too difficult for politicians and Governments to deal with. I am not optimistic that anything will change in the foreseeable future. As a result of that, we are planning our business on the basis that there will be no change to the capacity at the airports that we operate to in London. We have made decisions based on that assessment. I am an interested observer at this stage. I have very strong views. I campaigned long and hard for the third runway under the previous Government. I felt that the decision of the Opposition, both the Conservative party and the Lib Dems, in opposing the establishment of the building of a third runway was wrong and that the decision of the Government to cancel the approval for a third runway was a mistake. I believe we will live to regret that decision.

Q240 Chair: You say you are planning on the basis of there being no change. Over what period no change-ever?

Willie Walsh: I have said publicly that I still believe that in 2050-if you want to take that as a long-term view-British Airways will be operating from a two-runway airport at Heathrow. I don’t see anything that would indicate to me or convince me that that situation will change.

Q241 Chair: Do you think there will be any expansion at other airports in the south-east?

Willie Walsh: I think cases can be made for additional runways at some of these airports. The debate needs to be widened significantly to understand how these new runways would be funded. I am always interested to hear airports making commitments to spend money. Typically, they are committing to spend somebody else’s money. I am not aware of any consultation that has taken place between the airports and the main airlines operating at the airports to justify the significant additional capital expenditure that would be required and the resulting increase in operating charges at the airport to pay for that investment.

I have seen the public statements by Gatwick about a second runway after the ban on the second runway passes in 2019 or 2020, but I am not aware of any discussions that have taken place between Gatwick and the airlines operating there to see if the airlines actually want another runway at Gatwick and to see how the airport would propose to fund the building of a second runway.

There are a lot of issues that need to be discussed in quite some detail before we could make any reasonable judgment as to whether there will be a change in the number of runways at the airports in the south-east of the UK.

Q242 Kwasi Kwarteng: You have clearly stated your position with regard to why you don’t think there will be any movement. Why do you feel that the reports of these Commissions have in the past simply failed to get any traction? Is that politicians being too afraid of making bold decisions? What is your understanding of that failure?

Willie Walsh: I think it is fear on the part of politicians. They are afraid to tackle tough issues. I read with interest statements made by the Prime Minister about the responsibility of Government to tackle the difficult issues. This is a difficult issue that has been kicked into the long grass and I think it will stay there for some considerable time. I don’t think you require a Commission to spend three years considering an issue that has been debated, particularly given that there was a similar Commission over 30 years ago that concluded that additional capacity was required.

It is too difficult. There are 73 constituencies in London. The political parties take a view that expansion of the airport at Heathrow will be unpopular and therefore risks votes. It is a decision that politicians will take, rather than looking at the national interest and what is required to address the economic needs of this country.

It is quite staggering and the figures I give are interesting for those who want to listen. If you go back, in 2001, Dubai international airport ranked No. 99 in the world in terms of international passengers. Heathrow was No. 1. In 2010, Dubai was thirteenth. In 2011, it was fourth. It has seen growth to the end of October of this year of 13.5% versus growth at Heathrow of 0.6%. It will overtake Heathrow as the No. 1 international airport in the world certainly within two years-three years at a push. It is doing that at the expense of growth in the UK.

If you look at Eurostat data for 2007 to 2011, the growth in Europe has been somewhere in the order of 6.4%, if you exclude the UK. If you look at the EU 27 and take out the UK, we have seen growth of about 6.4%. That is 55 million or 56 million additional passengers. The passenger numbers in the UK have gone down by 7.2% or about 16 million passengers. The idea that we are in a recession and there is no growth is a nonsense. Yes, we went through a recession in 2008 and 2009, but most countries have come through that, certainly in terms of airline passenger numbers, and have seen significant growth. That growth is taking place right across the world. The only place we are not seeing growth is here in the UK and particularly in the south-east.

Q243 Chair: Is it your view that there isn’t a need for growth at Heathrow or in the south-east or that it is too hard to achieve that growth?

Willie Walsh: I think there is a need for growth. The global economy will continue to grow. Air transport will continue to grow. If you look at the aircraft manufacturers-naturally, they are biased, but it is an interesting assessment of the world-the recent report by Airbus indicates that they expect to see average annual growth of 4.8% between 2010 and 2030. That is a significant degree of growth. A lot of that will be in so-called developing economies, so internally within Asia, but the estimate for growth within Europe has been 3.2%. That is significant in its own right.

We don’t have that capacity available. You can’t see that level of capacity growth in Heathrow because the airport is full. The only way we will get growth at Heathrow now is by increasing the size of aircraft. Heathrow already operates with probably the highest percentage of wide-body long-haul aircraft anywhere in Europe and certainly by a long distance in the UK. You can’t get any more flights into Heathrow and therefore growth will be dependent on restructuring the nature of the flying that goes on in Heathrow. Those are some of the things that we will do at British Airways following our acquisition of BMI. Given that we don’t believe a third runway will be built, we went out and spent our money on acquiring BMI. We will use some of the slots that BMI had for short-haul flying to expand our long-haul network.

To some degree, the UK economy will benefit because we will provide connectivity to growth markets, but it is not going to be the level of connectivity that will enable the economy here to continue to compete on a truly global scale.

Q244 Chair: How much growth can be achieved by the methods you have now suggested?

Willie Walsh: We are estimating that in the short to medium term we can probably grow our capacity by 2.5% to 3% at a push. That is largely by replacing narrow-body aircraft with wide-body aircraft. We will not significantly increase the number of aircraft in our fleet. In fact, the number of aircraft will reduce, but the average size of the aircraft we are operating will increase. We can certainly do that for the next five to 10 years with the slot portfolio that we have.

From a British Airways and IAG point of view, we have taken steps at least to ensure that we have an opportunity to grow. That growth will not keep pace with the growth internationally in other countries and will not enable us to provide the same level of connectivity to important growth markets. We will get some and that is an important feature of the British Airways’ business plan, but the UK economy will still suffer as a result of the lack of capacity. It is very much the case that capacity is required, but, as I have said, I don’t believe we will see that capacity being provided.

Q245 Kwasi Kwarteng: You have said that the UK economy will suffer. I would be interested to hear you giving more specifics on what the dangers and the risks are. I would also like to ask you about your view of Michael O’Leary’s suggestion that, instead of just thinking about Heathrow, we should try and have a new runway at Stansted, Gatwick and Heathrow, vastly increasing capacity and thereby enabling them to compete fully with each other.

Willie Walsh: His premise was an interesting one. He argued that, if you had excess capacity and therefore built traditional runways at Heathrow, Stansted and Gatwick, you would have greater competition between the airports. Competition between the airports should lead to lower charges for the airlines and for customers and better quality of product, so you would have genuine competition, which we don’t have today. I would agree with that, if that is what you are looking for.

Who is going to pay for those runways? I have no interest in paying for a runway at Stansted, but, if Michael wants to pay for it, I am sure people will let him do that. I don’t see a business case to build a second runway at Gatwick. Given that the ultimate price falls through to airlines and passengers, I would want to see a business case that justified that. The only business case that you could stand over is a business case to invest in a third runway at Heathrow. As I said, I don’t think that is going to happen, so we are not going to waste any time spending money, planning or looking at options around that because I don’t think it’s going to happen.

Q246 Lucy Powell: I have a slightly related point about the issue of hub versus multi-hub. We heard yesterday from the different airports. Gatwick airport were quite aggressive in their assertion that their expansion would alleviate a lot of the capacity issues and that they could in fact become a secondary hub that would be able to provide some of the long-haul flights. What is your view of that? You have just said now that you did not think there was any business case for a second runway at Gatwick.

Willie Walsh: No. If you look at the airports, the nature of the business at the main airports is very different. At Heathrow, you have a relatively high proportion of long-haul aircraft. I just looked at some figures so I will quote them here. 64% of all Heathrow passengers are from non-EU 27 countries. If you exclude domestic travel and EU 27-take that out of the equation-64% or 41.5 million passengers at Heathrow are from non-EU 27. If you look at the same figure for Gatwick, it is 7.2 million. Non-EU scheduled services at Gatwick are 21.5%. If you look at Manchester, it is 3.8 million or 23%. The nature of these airports is very different, and the idea that one airport is the same as another is not true.

If you further dig into the activity at Heathrow and the others, what is interesting about Heathrow is the high percentage of business travel. It is 28% business travel compared with 12.4% at Gatwick, 12.6% at Manchester and 13.6% at Birmingham. If you look at the split between foreign and UK-based, there is equally quite a difference.

When you look at the leisure market, what is surprising is that there is actually a surplus, if you like. We talk about a tourism deficit, but there is a surplus of foreign tourists flying into Heathrow versus all of the other airports where there are more UK-based tourists flying out of the country. The activity at these airports is very different.

Yes, you can have a second runway at Gatwick if you can afford it. The idea that Gatwick will then become a hub doesn’t necessarily follow. You would have to do a lot of work, and to change the profile of the customer base, both in terms of the airlines and the passengers, would take years and years.

What you have in Heathrow, as I said, is the No. 1 international hub airport in the world. It is No. 1. The UK has the No. 1 international hub airport in the world. The debate that we have had is how can we constrain that; should we close it down; should we stop the growth; should we artificially somehow try and create something to compete with it? It is not going to happen. The amount of money that somebody would have to spend-and it won’t be IAG-in trying to achieve that would be huge. We tried to do it in the 1990s and it was a failure; it cost us a fortune. We will not try to do it again.

You have to start with looking at each of the airports. What is it that they are doing today? Who are the customers flying from these airports? You have to try and understand how you could change that, how long it would take you to change that and how expensive it would be. At Heathrow, you have the starting position. You are No. 1 in the world. The idea that you can do this overnight or even in a reasonable period-and I would describe a reasonable period here, given that the runway could not be built at Gatwick until 2020, as 2030 or 2040-is so far out in the future that the lost ground in terms of the UK economic position will quite honestly make these issues irrelevant. You will be trying to catch up so much that we won’t be able to afford it.

Q247 Iain Stewart: I want to pick up on one of the comments you made about attempting to have an alternative hub in the 1990s. Were you referring to Birmingham there?

Willie Walsh: Gatwick.

Q248 Iain Stewart: You did have a regional hub at Birmingham for some time and then you discontinued that. Can you segregate the transfer market into long-haul intercontinental against European transfers? If so, could you then restart a secondary hub at Birmingham or some other airport?

Willie Walsh: I have looked at some of the figures. Manchester airport is probably the best example. I know Birmingham has ambition and has expanded its runway, but from memory-I can probably check the figures and I have them here somewhere-the passenger traffic at Birmingham has been in decline for the last few years. I don’t think an extended runway is going to make a big difference there, to be honest with you.

Manchester is probably the best example where they have identified a significant number of customers who fly from Manchester to China. They believe they could attract flights to China. The interesting thing about it is that there is a big difference between flying a short-haul narrow-body aircraft and a long-haul wide-body aircraft. Price is one of the things. The cheapest wide-body long-haul aircraft today is somewhere in excess of $220 million compared to about $80 million for a short-haul aircraft. Typically, there are about 250 seats in the aircraft. You need a lot of passengers to justify a daily service. You would probably need at least 150,000 passengers annually, assuming that they all travelled in an equal distribution across 365 days of the year; otherwise you are not going to be able to operate a daily flight.

There isn’t sufficient traffic that wants to go to these airports or to these cities to justify that. You might be able to get some services. You are not going to be able to get a regular frequent service to multiple cities. The only way you can do that is through a major international hub airport, where you can supplement the direct demand that exists with transfer traffic.

I just can’t see how you can do this on a viable and profitable basis. If you assume that airlines are sensible and look to make a return on the significant investment that they would have to make-in excess of $200 million to buy the aircraft-I don’t see sufficient traffic existing in many of these markets to justify that level of commitment. So, quite honestly, if we are talking about long-haul global connectivity, it really works best at a major international hub. The other way it works is where the airport is served as a spoke from somebody else’s major international hub. That is what you are seeing with Dubai.

The interesting thing about Dubai is to look at distance, because the environmental argument is very important here. British Airways started flying from Heathrow to Seoul in South Korea. If you look at the great circle distance, which is the shortest route between two points on the globe, flying from Heathrow direct to Seoul is about 37% shorter than if you fly Heathrow-Dubai-Seoul. In fact the geographic location of Dubai does not really benefit anybody in terms of distance and environmental issues, travelling from the UK other than to places like India, because it is not well located geographically.

What we are seeing today is that people from Manchester are flying to Dubai to connect to India. They are flying significantly longer distances than if they were flying Manchester-Heathrow. If you are concerned with the environmental argument, frankly, we are actually pushing people into less environmentally sustainable-friendly ways of travelling because we are forcing them to transfer over other hub airports outside the UK.

The issue is quite simple for me. The economics of the airline industry are pretty fragile at best. Airlines do what makes most sense and struggle to make profits doing that. There is no way you will get airlines committing to doing something that has no sustainable return and no economic case to support it. Quite honestly, the aspirations that some of these airports have are clearly unattainable.

Q249 Iain Stewart: I want to approach the question from another angle. It is not about feeding the long-haul flights at a hub; it is whether you can remove from Heathrow some of the European connections to another airport.

Willie Walsh: But they are vital to supporting the long haul.

Q250 Iain Stewart: That is what I am trying to get at. You could not segregate that market.

Willie Walsh: No; they are vital. You can operate what we call point-to-point very successfully. If you look at the profile of passenger traffic and airlines operating from the likes of Birmingham and Manchester, there is a significant point-to-point market. There is a significant charter market as well-a leisure market. At Heathrow, the structure is such that you need the short-haul European flights available to feed traffic into the long-haul hub.

From an economic point of view, the major concern is about the long-haul global connectivity. Sometimes that is at the expense of very important economic markets. They often get dismissed. I have heard some politicians saying that we should stop flying to places like Cyprus and Greece from Heathrow. Interestingly, there are only six EU 27 economies where the UK has a balance of trade surplus. Greece and Cyprus happen to be two of them. The idea that you stop flying to places that are economically important to you is madness to me. This is where the debate has gone wrong. People aren’t looking at the big picture here. What is the economic and environmental issue? What is important today? What has been driven by history and what is going to be important for the future?

It is a very important debate that has been glossed over. I have not seen any political engagement. It needs to be cross-party, let’s be honest. You need to see full cross-party engagement in this issue if you are to see decisions being taken that we know will be implemented and will be able to follow changes in Parliament, because these are long-term decisions. I just don’t see that happening.

Q251 Chair: You have cross-party interest in this Committee this afternoon. What circumstances would lead you to resume international flights from regional airports?

Willie Walsh: It is very simple. If we could make money doing it, we would do it. The focus of BA has been to have a long-haul network primarily operating from Heathrow. We fly from three London airports: London Heathrow, which is our main area of operation, London Gatwick, which is an important airport for us, and London City. All three London airports are very important. We fly from all three London airports to points in the UK operating in the domestic market. From Heathrow, it is mainly about providing connectivity to the long-haul network that we operate, which is not available from the cities on a direct basis.

If we could make money flying on a point-to-point basis from other airports in the UK, we would do it. If you look at our aircraft, our long-haul aircraft are typically configured in what we call a premium rich configuration. We have a lot of seats in first and business class because there is huge demand for that product in London. The demand for that product outside London is a tiny fraction of it. If you look at it, the premium market in London is twice the size of Paris. Paris is twice the size of Frankfurt and Amsterdam. It is 10 or 20 times the size of the market in other UK airports. We would have aircraft configured in a way that is extremely inefficient for airports other than the London airports that we fly from. It just wouldn’t make sense for our business.

What you could do is have a dedicated fleet of aircraft configured for these airports, but that adds complexity and cost. If we felt that we could do that and make money doing it, then we certainly would look at that. But, historically, we have not been able to do that and I suspect it is not something that fits very well with our business model. There are other airlines that can do it better than us. They are typically the low-cost no-frills airlines. They dominate that market, so I suspect that is where you are going to see the main growth coming from in airports outside London.

Q252 Karen Lumley: Do you see any circumstances at all where there will be a second hub airport in Britain?

Willie Walsh: You can build it. Without question, you can try and establish a second hub, but the economics are fragile, at best. I can’t see how you can have a second hub that people would, over time, want to fly to and stay flying to. The reality of it is that despite the attraction of Gatwick-and it is a much cheaper airport to operate to than Heathrow-most of the long-haul carriers flying into Gatwick want to fly into Heathrow. Gatwick Airport won’t say that, but I know because the airlines that are flying into Gatwick contact me and say, "Is there any way we can get slots at Heathrow?" If they had the opportunity to fly from Heathrow, they would. Technically, there is nothing to stop you doing it, but from an economic point of view I can’t see that you can make a business case to justify it. Anybody who tries to do it is likely to spend an awful lot of money and lose an awful lot of money trying to do it.

Q253 Karen Lumley: What is your view on Boris Island?

Willie Walsh: Technically, it is possible. Financially, there is certainly no way that I have seen that you could make a business case to support it. The level of investment required, the capital commitment and the return that would be required would make the operating costs of the airport so high that nobody would want to fly there. The only way you could ever make an airport like that succeed would be to close other airports and force people to fly there so that the situation was that they had no choice other than to fly to it. I can’t see that happening.

Q254 Karen Lumley: Do you think there are too many airports in Britain?

Willie Walsh: I think regional airports are very important for regional economies. They make a huge contribution both in terms of jobs and investment. Without question, they do attract foreign investment where there is an airport and when you can get access. I think Britain is fortunate to have the number of airports it has. Many countries would like to see more airports in their countries, and many countries are building them. China is building 52 additional airports in the next few years, but then the size of that country would justify that.

I don’t think you could argue that there are too many. There is probably a case to be made for a better geographic spread. You could argue that some of the airports are too close together and create some competition. That is always good for airlines but I am not sure whether it is sustainable in the long term. I don’t think we should be critical of the number of airports. Every region that has an airport would be very worried if they lost the airport.

Q255 Karen Lumley: How do you think HS2 is going to work with aviation strategy?

Willie Walsh: I have been a supporter of HS2 because I believe that integrated transport is very important. I think high speed rail is certainly a positive development. My preference would be to see HS2 linked directly into Heathrow. I have clearly stated that if you had a high speed rail link between Manchester and Heathrow airport we wouldn’t fly to Manchester. We fly to Manchester because there are hundreds of thousands of people in Manchester who are flying to Heathrow to connect. They are not flying to London; they are flying to the world. The most efficient way for them to do it, and in some cases the only way for them to do it, is to fly or drive to Heathrow. They are not going to take the train into the centre of London and take another train out of the centre of London. They will fly to Amsterdam or somewhere else. If we had direct high speed rail links from Manchester into Heathrow-particularly Manchester, because there is a big market there-then we wouldn’t fly to Manchester. We fly there because there are people in Manchester who want to connect. The same would apply if you could connect to Scotland. It is going to be 2032 before you see it in Manchester and I don’t know when you would see it in-

Q256 Karen Lumley: But don’t you see any aspect for Birmingham Airport, for example, where people would come out of the north of London and it would be easier to get to Birmingham to use that than to go to Heathrow?

Willie Walsh: Yes, if you have the flights from Birmingham. But, if you want to fly to China, you are not going to have flights from Birmingham. If you want to fly to thousands of destinations, you are not going to have those flights from Birmingham, which is primarily a short-haul leisure market. That is the nature of it if you look at the passenger profile flying from Birmingham. Is that going to change? It might change a little but it is not going to change an awful lot.

Q257 Karen Lumley: There is no way you see yourself going back to Birmingham.

Willie Walsh: No, I don’t. Certainly I don’t see any business case or business justification for us to operate long-haul flights from Birmingham. It may attract a couple of other foreign airlines to operate into Birmingham, but not on a scale that will make any difference and certainly not on a scale that would justify the investment in HS2. If the business case for HS2 is to connect to Birmingham airport, I would really worry. If there is a business case to connect to Birmingham airport, there must be a business case that is 20, 30, 50 or 100 times more robust to connect to Heathrow. So I just don’t see it.

Q258 Karen Lumley: You don’t see rebalancing the economy as a priority for Britain.

Willie Walsh: Rebalancing the economy is a nice thing for politicians to talk about but it is difficult and expensive to do. Often, in terms of rebalancing it, you may have a worse overall economic position. You have probably heard me quote this. I was in China and a very senior business leader there said, "What is this thing about balanced growth in the UK? I will take imbalanced growth-unbalanced growth-over a balanced recession any day." That is the risk. The risk is that we try and rebalance things, but, in doing so, we create quite a bit of damage.

We have the No. 1 international airport in the world. I don’t think the debate should be, "Can we get rid of the No. 1 and have the No. 8 or No. 9?"-that that is somehow better. You are the best in the world at something. Surely you try and keep that and, in fact, build on that. That is what other economies have tried to do.

Chair: That is the issue and its ramifications that we want to consider.

Q259 Lucy Powell: I want to ask about the environmental case. We heard from some of the environmental campaigners yesterday. Do you think that you can make an environmental case for Heathrow expansion? If so, do you think someone should make that? Obviously, there is the issue around stacking. You referred earlier to an issue around some of the connected flights going via Dubai. Has anybody done that work? Do you think you could start this from a different perspective and make the environmental case for Heathrow expansion?

Willie Walsh: I would not seek to make an argument that a third runway at Heathrow can be justified on environmental grounds. The argument is that if you have a third runway you will have less stacking. That doesn’t hold up. Yes, if you had a third runway, you are likely to have less stacking. The figures are interesting and you probably heard them yesterday. It is estimated that we had about 270,000 tonnes of CO2 generated by aircraft stacking between June 2011 and July 2012. It was clearly unnecessary.

Chair: We must suspend the Committee for 15 minutes. I will ask members to come back as soon as they can.

Sitting suspended for a Division in the House.

On resuming-

Q260 Kwasi Kwarteng: I would like to declare a constituency interest inasmuch as British Airways employs, I believe, 1,500 people who live in my constituency. There are also 2,500 additional residents of my constituency who are on the British Airways retirement pension scheme. This is clearly something of absolutely vital importance to my constituency. In relation to this, I would like to ask what you think the prospects are for Heathrow and for the economic climate of the area should Heathrow close down.

Willie Walsh: Devastation, I would have thought. I have not given it much consideration because, quite honestly, the scale of the problems you would see if that happened would be unlike anything we have seen before. When you look at the number of people who depend on Heathrow directly or indirectly for employment, it would have a devastating effect on the economy of the region. While I know there are many local councils, authorities and groups who oppose the expansion of Heathrow, there would be very few who would support the closure of Heathrow because of the effect that it would have on employment, business and the general economic conditions in the environment.

Q261 Kwasi Kwarteng: On that environmental point, clearly you have very strong views about the expansion of Heathrow. In the political climate we are in, I am afraid that people are looking at alternatives because there is a vocal lobby of people in the area who do not want more expansion or more noise. They are worried about the environmental impact. I was wondering whether you would meet that argument halfway. Are you open to any suggestion that we should have another hub in a more suitable environment?

Willie Walsh: I don’t see a case for it. I have looked at most, if not all, of the proposals that have been in the public domain. I have spoken to some of the people behind some of these proposals. I don’t see a business case that could justify it.

There is clearly a very important need to look at the economic and environmental contribution. I do not think you can look at one without the other. Sometimes the debate has become polarised in that there are some groups who only want to focus on one and others who only want to focus on the other. I actually look at both. I fully recognise that there are environmental issues that need to be addressed. I believe a lot of progress has been made on environmental issues in relation to Heathrow. There is a very clear focus on the issue because everybody who has or has had an interest in the operation and expansion of Heathrow has recognised that the environmental issues have to be addressed and should be improved.

We have seen significant improvement in the noise profile of Heathrow. Aircraft are getting quieter without question and will continue to get quieter. Big investment is being made in that. When British Airways was looking to place a significant order for aircraft back in 2007 and 2008-certainly 2007-I made it very clear to both the airframe and engine manufacturers that we would not consider their aircraft unless we saw a significant improvement in their environmental performance, particularly noise. We said that price was not going to be the only issue we looked at; we would give equal weight to the environmental performance. The manufacturers have taken that on board.

Heathrow is a specific case because the issue of noise is of greater relevance at Heathrow than at many other airports around the world. Heathrow is a very important airport, so the manufacturers have put significant investment in to improving the performance of their aircraft.

Q262 Kwasi Kwarteng: Chair, I have a couple more questions. What do you think of the Heathwick proposal?

Willie Walsh: I think it is nonsense.

Kwasi Kwarteng: Then I will be finished; I am sorry about this.

Chair: Everybody has their points to make.

Kwasi Kwarteng: We are quite reduced numbers so I am exploiting this to ask a few questions.

Willie Walsh: I think it is a nonsense.

Q263 Kwasi Kwarteng: You think Heathwick is nonsense.

Willie Walsh: Yes.

Q264 Kwasi Kwarteng: My last question is this. There is clearly a conflict of values here. You are a commercial businessman, who essentially wants to make money. I could point you to residents who say, "We have had enough, we don’t need any more aviation, we are quite happy with where we are and we want a quality of life. We are not interested in you making money. Of course you are going to back expansion at any cost. We have had enough and we just want to carry on with our lives as they are." What would you say to someone who made that objection?

Willie Walsh: The first thing is that I won’t back expansion at any cost. Being a business person, I look at the business case to justify any investment. There are lots of people who will back expansion regardless of how much it costs, mainly because they are not going to pay for it either in terms of the financial or environmental cost. We give significant weight to all of the arguments and we would only support a case where we believed there was justification, where the environmental concerns can be taken into account and where there is sufficient balance between the environmental issues and the economic arguments. I would not make the case, and I would not have supported the case for a third runway when I did, if I did not feel confident that those environmental concerns could be addressed and could be met. It was very clear at the stage when this was being debated before the 2009 decision that the environmental issues were a significant factor in the debate that went on. We recognised that any licence to grow, if you want to put it that way, could only be achieved if the environmental criteria that had been set down could be achieved.

I firmly believed that it could. I believed the issues of noise, local air quality and global climate change could be addressed. I still believe that that is the case, but the argument for runway expansion at other airports is less secure if you look at those criteria.

Q265 Lucy Powell: Could you expand on that a little further? You talked about the environmental impact before the vote. We obviously saw some concessions to that with the previous decision, but what further do you think could be put on the table to offset some of those environmental concerns on a decision around Heathrow expansion?

Willie Walsh: In relation to noise you probably have quite a good interaction between the airport, the airlines and particularly British Airways, and the local community-HACAN. We have engaged with one another in what I think is a very positive and constructive way. There are changes that can be made to the operating procedures at Heathrow that would make a difference in terms of the noise portfolio. We are doing a lot of research in relation to that.

Many of the things we do in terms of how we operate our aircraft are established by practices that were relevant back in the 1940s and 1950s. These can be changed. We are looking at a steeper final approach path into Heathrow. We are looking at dispersion. The navigation equipment on aircraft today is so accurate that we will fly over exactly the same point on every departure because the navigation equipment will bring us to that point. That is not the way it was 30 years ago when I started flying. The navigation equipment was much more basic. There is a lot that we can do utilising the equipment that we have and introducing new equipment that can certainly improve the noise situation. When you combine that with more efficient and quieter aircraft, I genuinely believe we can make progress.

We are never going to eliminate noise. The reality is that even a glider will make noise. There is aerodynamic noise from something without an engine. We can make significant improvements in terms of the noise footprint, and we will, whether there is expansion at Heathrow or not. I see it as very much in our interest to do that. We will continue to work with the local community and continue to look for ways to improve that.

On issues in relation to local air quality, again, there are technological solutions and improvements that can be made with regard to engine manufacturing that can help to address that. On global climate change, huge steps forward are being taken. We are delighted with the programme we have in conjunction with Solena to create what we believe is a truly sustainable biofuel, to put our money where our mouth is. We are committing $500 million of BA expenditure to take the product that this new facility will produce so that we can prove commercial success when we know there is technology that exists that can turn urban waste into a sustainable biofuel. There is a lot of work going on. That work will go on whether the expansion takes place or not because it is absolutely right that it does. I would hope that the communities around the airport will recognise that we are trying to improve the situation and will continue to do so.

Q266 Iain Stewart: I have a couple of unrelated questions out of thoughts that have arisen in my mind in the discussion. First, can I go back to your earlier comments about High Speed 2? If it was configured in the optimal way from your perspective with a direct connection to Heathrow, with the transfer of passengers who you say could transfer off short-haul domestic flights into Heathrow, what sort of percentage of slots would that free up at Heathrow for longer-haul services?

Willie Walsh: From memory, if you look at all of the domestic operation of the slots at Heathrow, it is about 8% of the total number of slots at Heathrow, if you took in the full domestic operation. If you were able to provide high speed connectivity that would replace all of that, you would free up less than 10% of slots.

Q267 Iain Stewart: So there would be a small increase in capacity from that, but nothing game-changing.

Willie Walsh: Any increase in capacity clearly would be welcome. Not all of that capacity could be utilised for long-haul flying because of the times of the slots, but it would free up some capacity; so I wouldn’t dismiss it as being insignificant. I think the time scale that we are talking about is quite long, but it would be around 8% from memory.

Q268 Iain Stewart: Our discussion has focused entirely on passenger flights. There is also the question of air freight. I am not sure to what extent you carry freight in the cargo hold of your passenger flights, but are there any aspects of air freight policy that influence our discussion on airport capacity?

Willie Walsh: The only dedicated freight or aircraft that we operate operate into Stansted. We have three 747 freighters. They don’t and can’t operate to Heathrow, but we do carry freight on our passenger aircraft. That is an important part of our business. In looking at the economics of a route, we would take into account the revenue that we can get from freight as well as passenger travel.

Q269 Iain Stewart: In terms of existing capacity for handling freight, is that sufficient to cope with current demand or do we need to build in that sort of-

Willie Walsh: No; I do not think there is any significant development that would be required and certainly not at Heathrow. You wouldn’t do it at Heathrow.

Q270 Chair: How does your merger with Iberia affect your commitment to developing direct services from the UK airports?

Willie Walsh: It doesn’t, in that if we have the opportunity to develop routes directly from the UK we will. Evidence of that was our acquisition of BMI. The business case to acquire BMI was that it would give us access to slots that we could use for long-haul expansion. Not all of the slots can be used, but we have estimated that it is about one third of the slots that we acquired. Maybe 14 slots will be used for long-haul growth. Typically, that will give us the opportunity to fly to 14 new long-haul destinations or a number of destinations with multiple frequencies. We will, if possible, expand our long-haul network at Heathrow, but the growth that won’t go to Heathrow may well go and will go to other European airports. We would hope that some of that will go to Madrid, so we will also expand our business over time at Madrid.

Q271 Chair: Is it that way on, Mr Walsh? Is it that you would go to the other European hubs including Madrid if you couldn’t go to Heathrow, rather than a decision that you would rather go somewhere else?

Willie Walsh: If we can’t do it at Heathrow, then unfortunately it is going to be outside the UK. It is not going to be at one of the other UK airports.

Q272 Chair: You prefer Heathrow.

Willie Walsh: Absolutely; yes.

Q273 Chair: Are you clear about that? That is where you want to start.

Willie Walsh: That is why we spent so much money acquiring BMI. It may not have been the headline price for the acquisition, but the costs that we are incurring as a result of taking on that loss-making entity were all justified on the basis that it would give us an opportunity to expand primarily our long-haul network at Heathrow.

Q274 Chair: If you are mistaken and a third runway is built at Heathrow, would that be sufficient or would there soon be a need for a fourth?

Willie Walsh: It is an interesting question. In the past, I have felt that a third runway would be sufficient for the foreseeable future and certainly beyond my business lifetime. It would be wrong for me to say that there will never be a requirement for a fourth runway because I don’t think it is for me to say that. It would be misleading if I was to make an argument that a third runway was the end of it and we would never need a fourth. I think a third runway may well be sufficient, to be honest with you, but I can’t say that for definite.

Q275 Chair: You wouldn’t put a date on "sufficient".

Willie Walsh: I have argued that, if you had a third runway with the potential, the growth was estimated to go from 480,000 slots to 702,000 slots. I think that would be enough to take you well beyond 2030 and probably to 2040. I have no idea what is going to happen then. I haven’t really thought about it too much. My reason for supporting a third runway when I did was because I believed it kept us in the game. Had the decision that was taken back in 2009 gone ahead, we would be looking at a third runway coming into operation probably in 2016. We would have demonstrated that we had the ability to grow.

The problem now is that other countries looking at us say that we are out of the game. Even if a decision was taken after the Davies Commission, which will report in 2015, I am sure it will be debated for a while, and if you got the go-ahead in 2016 you might see something happening in 2026. The world will have moved on. At that stage your third runway may well be sufficient, but, as I said, I don’t think it is going to happen.

Q276 Chair: There is a suggestion from the Centre Forum and Policy Exchange that there should be four new runways to the west of the existing Heathrow site. Do you have any views on that?

Willie Walsh: I wouldn’t support it because, quite honestly, I can’t see how you can afford to do that. People make these great suggestions because they are not going to have to pay for it. We would have to pay for the expansion. If I looked at it from a business point of view, I couldn’t see how you could support that scale of investment. Effectively, you are ignoring runways that you have. You have perfectly useful assets and you are saying, "We’ll just scrap them and start building something else in a completely different area." There is no business logic to doing that. They are looking at it from a technical point of view. Could you do it? Absolutely. Could you afford to do it? Absolutely not.

Q277 Chair: Do you want to see any changes in the regulatory regime?

Willie Walsh: How long have we got? I think the CAA is an excellent safety regulator. It is world class when it comes to safety regulation. The CAA is poor in other areas of regulation. The CAA has been very poor when it came to economic regulation. It was far too generous to the airports, allowing excessive returns through very high prices. I believe there is a case for economic regulation. Somebody should do it but the CAA has a poor track record. I am not arguing against having airports economically regulated. I am just arguing for a better and tougher economic regulator than we have had in the past.

Q278 Chair: What about noise regulation? Would you like change there?

Willie Walsh: There should be, and there are, global standards for noise. That is the right way to do it. We buy the aircraft. We are the operators of the aircraft. I can’t do an awful lot with the aircraft when I have bought it. You need standards to be set for the manufacture of aircraft and engines. That is the best way of achieving progress. That is how we have achieved progress in relation to the noise performance of existing aircraft through ICAO specifying noise regulations for the aircraft. That is the best way to do it. The idea that you have different countries regulating noise just leads you into a potential mess. I don’t think that is an efficient way. Again, you always have to look at the economic argument and the environmental argument. Looking at one without the other can lead us into decisions that will have massive economic consequences that may not be recognised by the people who are taking decisions solely on environmental grounds.

Q279 Chair: Do you have any views on air passenger duty?

Willie Walsh: I think it should be scrapped. It is damaging the UK economy. The evidence is clear. The figures that I quoted earlier were Eurostat statistics. I picked Eurostat because it is a common set of data across the EU 27. The CAA has data as well that will show that we have seen a decline in passenger numbers. Some of that has been as a result of the recession, but a lot of it has been as a result of this excessive tax, which is unique to the UK and is putting us at a competitive disadvantage. There is no better example than what happened in Belfast, Northern Ireland, when it was recognised that, if the tax continued, the only long-haul flight that operated to that airport-the United service from Newark to Belfast-would be cancelled. In the face of that economic issue, the tax was initially reduced to the domestic rate and now, I believe, has been scrapped altogether.

I have challenged the Chancellor, along with the CEO of Ryanair, easyJet and Virgin, to commission an independent review of APD. I have pointed to the example of the Netherlands, where they recognised the big economic impact of their aviation tax when they introduced it in 2008. They set out to raise €350 million. They raised €312 million in the first year, but when they looked at the economic impact of that they found it had hit their economy by €1.2 billion; so they scrapped it after the first year. It was €312 million versus €1.2 billion: a very easy decision. I am not saying that the ratio would be the same here in the UK, but I believe the argument is fundamentally sound, and I think an independent assessment would demonstrate that there is more damage being done to the economy than there is money being raised through this tax.

Q280 Chair: What about variable rates of air passenger duty?

Willie Walsh: If you devolve APD to Scotland, for example, and the Scottish airports don’t charge it, you are going to have airports that would see themselves competing with those Scottish airports claiming that they are seeing business shipped across the border. There is evidence of that in Ireland, where quite a lot of people are driving to Dublin airport rather than flying out of Belfast. There is a €3 tax in Ireland versus the £13, £65, £85 or £93 tax that exists in Belfast. You will end up with distortion of business competition and potentially economics if you do that. My view is to keep it simple and just scrap it altogether.

Q281 Chair: You have said that you think expansion at Heathrow is the best thing to do. You don’t think it will happen. If I am correct on those two things, what then would you advocate as a solution?

Willie Walsh: That is why you get elected and I get to sit here and criticise you.

Q282 Chair: We have invited you here today to give us your answers.

Willie Walsh: We have bought another airline to give us slots to allow us to expand. British Airways will expand at Heathrow because we have acquired other slots. That is what we will do. I strongly supported the development of a third runway. I have found that since I have stopped supporting it and calling for it-and I won’t support it-that people are saying to me, "Well, you’re going to get it whether you like it or not." Maybe this reverse psychology should have been the approach adopted in the first place.

Quite honestly, if you are looking at the national interests, you should build a third runway at Heathrow. If I am looking at the narrow BA interests, we are all right. We have secured our growth through the acquisition of BMI. We will fully utilise that to ensure that we can expand and grow our network. There will be benefit to the UK economy as a result of that, but the UK economy will not benefit to the degree that it could if other airlines were able to expand as well.

Q283 Kwasi Kwarteng: I have one last question. You suggested at the beginning that you felt the Davies Commission was really a damp squib. You don’t think that there is going to be a third runway. Even if the Davies Commission says that we should have a third runway at Heathrow, you have already discounted that. My assumption, given those two facts, is that you don’t think this Commission is going to be particularly effective.

Willie Walsh: No, I don’t, and that is no criticism of Lord Davies or the other members of the Commission. It is just reflecting on what I see the political environment to be. If there was cross-party support and commitment to the Commission, I may take a different view, but I have not seen any evidence of that. So I suspect it will be exactly like it was when the Roskill Commission reported. You had a change of Government and people who did support it no longer supported it. We have the situation today where Labour supported a third runway. I think they now don’t. We have the Conservative Party, who were strongly opposed to it, who are now saying, "Let’s have a Commission report." From a political point of view, as an observer, I see no evidence of there being support. If there is no cross-party support, I can’t see how you take a report and do anything with it other than put it on the shelf, as has happened with many other Commission reports.

Q284 Chair: As far as I am aware, the Labour party position is that they accepted that the current Government had changed their stance and therefore accepted that position. I don’t think it is a definitive decision yet.

Willie Walsh: I just comment on what I observe. I am not establishing Labour party policy.

Q285 Kwasi Kwarteng: This is quite disturbing and alarming. This is a Commission that has been set up in good faith.

Willie Walsh: Yes.

Q286 Kwasi Kwarteng: You have essentially said that you are not going to bother reading it. You don’t think it is going to have any kind of impact.

Willie Walsh: No.

Q287 Iain Stewart: I have one last question. You have quite clearly stated that your future growth has been secured by your acquisition of BMI. Does that mean that other large airlines will secure their future by similar acquisitions?

Willie Walsh: If possible, but there aren’t many similar acquisitions available. It is clear from current media speculation that a number of airlines are looking at acquiring Virgin. I don’t think they are looking to acquire that airline for anything other than the slots that they have at Heathrow. That may well be the case, but there aren’t many other slot portfolios that are available in the way the BMI portfolio of slots was available to us.

Q288 Iain Stewart: The reason I ask is because I am trying to disentangle what is in a particular airline’s own commercial interest against the collective need to grow capacity. I am not clear where that line is currently drawn.

Willie Walsh: It is very simple. People have accused me of being solely interested in British Airways; so a third runway would benefit us. That is not necessarily the case. If a third runway was built, the slots that would be made available for that third runway would not go to British Airways. Most of those slots would actually go to our competitors. The cost of developing that infrastructure would largely fall to British Airways because we are the biggest operator at Heathrow. That is the nature of how infrastructure is funded at the airports.

I supported it because I felt that it was in the national interest and that anything that benefited the national economy ultimately benefited British Airways. It is the rising tide and we would all benefit from growth in the national economy. I don’t see that that is going to happen. If I sit here solely as British Airways and International Airlines Group, we have taken steps to secure our growth. We have spent our money to secure our growth, so we have put our money where our mouth is. Unfortunately, that is not available to many others because the number of slots available at Heathrow is limited to 480,000.

The only way you are going to get any significant growth other than from British Airways, and significant expansion of the network operated at Heathrow, is if you provide additional capacity. That means a third runway, because mixed mode is not going to give you real capacity increases. The utilisation of the two runways for capacity purposes would just make Heathrow a poor airport because any disruption would automatically lead to cancellations and significant disruption of schedules. The fact that we can use the two runways to recover from disruption is very sensible from a business and, I would argue, environmental point of view.

Chair: Thank you very much for coming and answering our questions.

Prepared 13th December 2012