Aviation Strategy

Written evidence from Birmingham Airport (AS 86)

Summary of response

1.1 Aviation provides the UK economy with the connectivity it needs to compete in the global marketplace.

1.2 Birmingham Airport believes that making the best use of the UK’s existing aviation capacity should be the Government’s number one short-term policy priority.

1.3 Birmingham Airport welcomes the decision to establish the independent Howard Davies Commission but recognises that capacity, noise and air emissions management issues prevent the Government from committing to a third runway at Heathrow.

1.4 Given the supply-side capacity constraints in the South East, Birmingham Airport believes that the Midlands has the export potential and latent passenger demand to make long-haul services from the airport viable.

1.5 Existing policy uncertainty and capacity constraints could be mitigated and airlines attracted to airports outside the South East if the Government used four short-term demand management policy levers. These policy levers are proportionate to the level of supply-side intervention that currently exists within the market, would incentivise airlines to keep using UK airports and ensure that UK Plc. remains the net benefactor.

1.6 Greater international connectivity to emerging markets from Birmingham Airport would improve the competitiveness of UK exports, boost employment in the productive sector and help rebalance the economy.

1.7 Investing in integrated surface access improvements, both rail and road, will increase the catchment area of airports and the ability of airports to compete with each other for new services.

1.8 There are two charges levelled at the suggestion that major airports outside the South East cannot sustain long haul connectivity – (i) with most Headquarters in London, there is limited scope to absorb demand from the South East because these airports have smaller catchment areas and passengers currently use airports in the South East, (ii) South East passengers will not use these airports, especially high-value business passengers which help route viability.

1.9 Birmingham Airport hopes that this response goes some way to ameliorating this perception. For additional case studies, an explanation of our policy suggestions and evidence that there is an untapped, latent business demand from the region, please refer to the attached reports:

(i) Don’t put all your eggs in one basket: A challenge to aviation orthodoxy,

(ii) Stimulating revival: the role of Birmingham Airport in rebalancing economic growth.

Chapter 2 – What should be the objectives of Government policy on aviation?

2.1 The UK’s aviation connectivity is concentrated in the South East where the level of population density generates large negative externalities. Short-term Government policy prevents expansion at Heathrow, Gatwick and Stansted and reflects the need to address these issues. In the long-term, the UK will need a sustainable and internationally competitive aviation policy and we look forward to contributing to the Howard Davies Commission on this issue.

2.2 Opponents of this policy attempted to reframe the debate to suggest policy-makers cannot meet the future needs of UK customers and businesses without increasing capacity in the South East.

2.3 Birmingham Airport believes that UK aviation policy should support the whole of the UK. In the short to medium-term, the Government should pursue a set of policies that acknowledge the supply-side and timing constraints in the South East and use demand management levers to fully utilise spare capacity at existing airports. In the long-term, Government policy should support the creation of a network of national airports capable of unlocking the growth potential of each regional economy, based on a particular region’s competitive economic advantage – see chapter 3.

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

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

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

2.4 Aviation benefits the UK through the connectivity it delivers for businesses and passengers. It provides businesses with quick and easy access to international markets and allows them to compete within the global marketplace. An open and well-connected trading nation also allows UK customers to have a choice of goods and services, lowering the price of consumer durables and improving standards of living. Aviation also enables passengers to enjoy the socio-cultural experiences associated with travel.

2.5 Aviation is of tremendous importance to the UK economy. Depending on the type of economic analysis cited, aviation is estimated to contribute up to £21 billion to UK Gross Domestic Product (GDP) and directly employs 326,000 workers across the travel and manufacturing sectors. One third of traded UK goods are transported by air freight and 65% of overseas visitors arrive in the UK by air. The tourism industry attracts £115.4 billion of direct and indirect benefits to the UK.

2.6 APD places UK aviation at a competitive disadvantage. The high costs associated with the unilateral tax act as a barrier to inward investment and discourage tourists from entering and spending money in the UK. HMRC forecast that the level of APD imposed 2009-2011 would result in 11,000 fewer flights from UK airports. Oxera Consulting calculated that this would cost the economy £750 million in Gross Domestic Product and c. 18,000 jobs.

2.7 Birmingham Airport has suffered first-hand from the detrimental effects of APD. Negotiations with Air Asia X over a new route to the Far East broke down because of the cost burden associated with operating services from UK airports. When questioned, Air Asia X cited APD as the main barrier. The new service would have created 250 new jobs and acted as a spur for the wider economy.

2.8 Birmingham Airport would like to see APD reduced across the industry. However, if this is not achievable, we would like the Transport Select Committee to hold an inquiry into the use of a variable APD rate – see chapter 3.

Chapter 3  - How should we make the best use of existing aviation capacity?

3.1 Over the last 20 years, the Government’s management of the aviation sector, and its ability to unilaterally influence choice, value and sustainability, has been in retreat. The decision by the Coalition Government to prevent the construction of a new runway in the South East, especially at Heathrow, demonstrates a shift back towards a more interventionist policy.

3.2 The current aviation policy environment is characterised by rigid capacity constraints on the South East coupled with uncertainty over future policy. Yet, with the exception of some environmental groups, industry stakeholders agree that the UK economy is suffering from a lack of international connectivity to emerging markets.

3.3 Birmingham Airport calls on the Transport Select Committee to launch a further inquiry into how short-term demand management policy levers could be used to balance the level of supply-side intervention that already exists, and promote the growth of high-value services to emerging markets from major UK airports with spare capacity.

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

3.4 Heathrow is operating at 99% capacity during peak times and is the busiest two-runway airport in the world. Gatwick operates at 96% capacity during peak times and is the busiest single runway airport in the world. This indicates that strong incentives already exist to ensure that London airports maximise the utilisation of existing infrastructure. The intensity of their operations is a testament to world-class demand management mechanisms implemented at these airports by NATS.

3.5 However, this process has come at a cost. The Civil Aviation Authority (CAA) found that the structure of demand management at regulated airports in the South East incentivises those airports to maximise through-put at the expense of punctuality and resilience. This trade-off encourages individual airlines to benefit from a marginal additional flight, because it generates revenue from operating this service. This results in sub-optimal capacity usage leading to negative externalities and disbenefits.

3.6 Evidence for this can be found in the average delay time experienced by passengers at these airports including taxiing times, the quantity of CO2 emitted over London due to stacking, the reduced performance of pre-existing services and the poor standing in which these airports are held internationally.

3.7 Birmingham Airport believes this question should be recast to ask how we should make optimal use of airport capacity in the South East, taking into account market failures such as environmental externalities, airspace constraint, a lack of resilience and congested surface access for transport infrastructure.

3.8 Delivering an airport which is at optimal capacity could be achieved via market-based mechanisms that internalise the stated externalities. A tax-based policy lever, such as a congestion charge, would discourage airlines and airports from rent-seeking by making them pay the full marginal cost of their actions. A complementary set of demand side measures, as outlined below, would prevent this traffic from moving to foreign hubs and ensure that UK Plc. remains the net benefactor.

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

3.9 Birmingham Airport believes that the current Government strategy does not adequately support airports outside the South East. Making the best use of the UK’s existing aviation capacity should be the Government’s number one short-term policy priority.

3.10 The enclosed report, Stimulating revival: the role of Birmingham Airport in rebalancing economic growth, shows that, with the right support, Birmingham Airport’s catchment area has the competitive advantage in terms of manufacturing exports to become the international gateway for the UK’s productive sector. This would lead to a revival in the UK’s overall output performance and facilitate the Government’s ambition to rebalance the UK economy.

3.11 The report shows that despite the lack of connectivity and accompanying lack of access to working capital enjoyed by the South East, Birmingham Airport has a vibrant economy with the potential to unlock sustainable long-term economic growth.

3.12 The economy in the catchment area generates £263 billion GVA per annum, 21% of UK GDP and its 14 million inhabitants account for 22% of national Gross Domestic Income.

3.13 The "catchment economy" has 12,296 companies involved in international trade. These companies consist of small-scale precision-based component manufacturers coupled with traditional craft-industries feeding into globally ranked prestige producers including Aston Martin, Jaguar Land Rover, Rolls Royce, Toyota, MG Motors and JCB.

3.14 Within the "catchment economy", 92% of exports are value added finished or semi-finished manufactured goods. The "catchment economy" generated a trade surplus of £5.4 billion in 2011, with imports representing 42% of the value of manufactured exports.

3.15 This export success has been achieved despite the "catchment economy" having an export profile heavily skewed to the European Union. The lack of long-haul international connectivity represents a barrier to further export success.

3.16 Short-term demand management policy levers could help unlock the latent demand from the catchment area and attract the spill-over traffic currently met by foreign hubs because of capacity constraints in the South East. They would provide commercial incentives to airlines to expand services from Birmingham Airport and support the sustained growth of the UK’s manufacturing economy.

3.17 Birmingham Airport would like the Government to investigate the viability of implementing four policy levers to make better use of existing capacity at airports outside the South East.

3.18 The outcomes and implementation measures needed to help correct existing demand deficiencies at airports outside the South East require the use of available implementation measures that incentive the desired outcome. Birmingham Airport considers that there are four available measures to affect this change:-

(i) Implement a differential tax regime at airports with spare capacity – a variable rate of APD would encourage airlines to establish long-haul services to emerging markets from airports outside of the congested South East. This would reduce the financial risk associated with establishing new routes from airports outside of the South East and ensure businesses have competitive connectivity to high-value customers in high-growth markets. [HMT is set to publish a report on this issue in November and we hope the Committee launches an inquiry into the feasibility of this policy].

(ii) Implement a congestion charge at congested airports - the value of this charge should reflect the margin cost of the negative externalities generated by squeezing more capacity into already crowded airports. [This approach is used in the energy industry, see peak hour pricing].

(iii) Create a network of national airports – this would help these airports to market themselves abroad and challenge the international perception that the only destination worth flying to in the UK is Heathrow. [Refer to Chapter 5 of Birmingham Airport’s Eggs in Basket report].

(iv) Unilaterally liberalise air service arrangements from this network of national airports and work with Governments in highly regulated emerging markets to develop new links – this would still allow major UK airports with spare capacity to compete for new services between themselves. Industry research shows that liberalisation stimulates competition and route creation. [Refer to p. 6 of the Eggs in Basket report].

c. How can surface access to airports be improved?

3.19 CAA research suggests location and surface access are primary influences on a consumer’s decision about which airport to make a booking from. Integrating airport surface access and publicising an Airport’s connectivity via several modes of transport provides more information and choice to the passenger or business. This helps the market perform more efficiently and enables consumers to make a more informed decision. It would also precipitate a more efficient distribution of demand between airports at the margin.

3.20 Improved surface access to airports increases an airport’s catchment area, facilitating the provision of additional routes from these airports. An additional benefit of overlapping catchment areas is that it would stimulate competition between airports, lowering prices and increasing choice for the consumers while improving route viability for airlines.

3.21 Birmingham Airport is an industry leader for rail-air connectivity. However, improvements to the West Coast Main Line (WCML) and the introduction of High Speed 2 (HS2) would enable the Airport, and wider aviation sector, to accrue the benefits outlined above.

3.22 Existing connectivity between Birmingham Airport and the WCML could be improved in four ways:-

a) Rename Birmingham International station "Birmingham Airport" – the station is only two minutes from the Airport on a free air-rail link, but this is not indicated on www.nationalrail.co.uk, leading to confusion by passengers of the location of the Airport and ease of access by rail. Renaming the station would provide more accurate information to the consumer.

b) Provision of rail services from 04:00 – current service restrictions mean that passengers cannot access the Airport via the WCML during the airport’s busiest time, "slot 1" for flights leaving 06:00 – 08:00.

c) Provision of a 59 minute service between Birmingham Airport and London Euston station – the DfT has indicated that this is technically possible. A direct, less than an hour, service would improve customer experience accessing the Airport from stations to the South, enhance the perception of Birmingham Airport and enhance the Airport’s ability to compete for traffic with the congested South East airports. This would make the service only 12 minutes longer than the Stansted Express, which has a 47 minute journey time.

d) Consultation on through-ticketing and code-sharing – the provision of tickets enabling customers to buy one ticket that integrates their journey across rail and air services is a major consumer innovation enjoyed by passengers travelling from rival European destinations. Offering this service would improve the UK’s reputation and ensure the industry is working in the customer’s interest.

3.23 Birmingham Airport is a major supporter of HS2. It will deliver commensurate benefits to the UK economy and enable the Airport to compete for additional feeder traffic from London. The 31 minute service from London to Birmingham Interchange would support the development of some additional long-haul routes from UK airports and help correct the often cited opinion that airports outside the South East cannot attract sufficient demand to make new routes viable.

3.24 Birmingham Airport works in close partnership with the Highways Agency on the Strategic Road Network and Solihull MBC on the local road network to improve road surface access to the Airport. The recent decision to invest £7 million in surface access road improvements demonstrates this commitment.

3.25 Birmingham Airport welcomes the recent announcement of the works on Junction 6 of the M42 as part of the Government’s ‘pinch point’ investment strategy. This will improve access to the airport and reduce traffic delays. Faster journey times will improve the attractiveness of Birmingham Airport as a destination point and improve connectivity between the region’s most significant industries, including the Airport, the NEC, Jaguar Land Rover and the Blythe Valley Business Park.

Chapter 4 - What constraints are there on increasing UK aviation capacity?

4.1 Birmingham Airport supports the target established by UK Climate Change Commission (UK CCC) to restrict aviation emissions to 50% of their 2005 levels by 2050. The Sustainable Aviation road map for tackling emissions demonstrates that the industry is serious about achieving this objective.

4.2 The UK CCC estimates that the UK could cater for an additional 60% increase in Air Traffic Movements (ATMs) without surpassing the its CO2 emissions target. This does not represent a passenger number, which would depend on issues such as the load factor on each ATM. The next generation of aircraft, the Airbus 380 and Boeing Dreamliner 787, demonstrate that technological advances are advancing sufficiently quickly to suggest that a 60% increase would allow the UK to remain internationally competitive.

4.3 A trading scheme is the preferred market-based mechanism to help address environmental challenges because it internalises the social and economic costs created by aviation and translates these into a monetised value. Rising costs send a clear signal to the market that it will need to innovate and reduce emissions if it wants to remain profitable.

4.4 Whilst we support the European Union Emissions Trading Scheme (EU ETS) as a fair measure to tackle the industry’s carbon emissions, only a global trading scheme will result in meaningful, long-term behavioural and environmental change. We oppose any unilateral action because the marginal social benefit of reduced emissions would be outweighed by the economic cost associated with the reduced competitiveness for the UK aviation sector.

4.5 Birmingham Airport’s objectives for noise management is to work with our stakeholders, including the local community and industry partners, to adopt the best practicable means to access, manage and minimise the impact of aircraft noise both now and in the future. The implementation of policies such as the increased use of Continuous Decent Approaches and a £200,000 annual sound insulation scheme are having a measurable impact – see the graph below. In 2011, of the 387 noise complaints received by the Airport, only 154 people formally complained. That represents a ratio of 0.016 complaints for every person within the 57db range.

4.6 Birmingham Airport acknowledges that airports situated in areas of very high population density, notably in the South East, may require an independent noise management authority to ensure the interests of the local community are adequately represented by airport policy.

Chapter 5 - Do we need a step-change in UK aviation capacity? Why?

5.1 Birmingham Airport welcomes the Government’s decision to establish the independent Howard Davies Commission to review all long-term options for UK aviation, including a new hub. We look forward to contributing to this process.

5.2 Analysis of the DfT’s passenger forecasts demonstrates that handling the growth of the UK aviation sector is a critical issue. Based on conservative projections of an annual growth rate of 2%, UK airports will have to cater for an average of 345 million passengers per annum (mppa) in 2030 and 520 mppa in 2050.

5.3 These projections reveal that there will need to be a structural shift in the management of the UK’s aviation resources if we are to maximise the growth potential that aviation can deliver for the UK economy.

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

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

5.4 Analysis of existing capacity at UK airports indicates that fuller utilisation of spare capacity could satisfy much of the DfT’s long-term passenger growth projections. It also challenges the assumption that a third runway at Heathrow would deliver enough capacity to represent a viable step-change for UK aviation.

5.5 Table 1 shows the DfT’s future terminal passenger forecasts. The red segment shows what a third runway at Heathrow could deliver by 2050. In 2030, Heathrow is expected to handle 85 million passengers. By 2050 this figure could increase to 90 million. It reveals that a third runway at Heathrow will only satisfy 16% of additional capacity requirements by 2030, falling to 7% by 2050. Heathrow’s relative contribution to UK aviation capacity will drop from 33% in 2010 to 17% in 2050.

5.6 The case for a third runway at Heathrow has three additional caveats.

(i) Capacity - the fact that Heathrow is situated on a cramped site in the West London suburbs means that it could never expand into a four or five runway airport like a Schiphol or a Frankfurt. Spatial restrictions mean that even if a third runway were built, Heathrow would have to start buying up whole sections of residential areas if it wanted to expand. This would be politically toxic.

(ii) Timing - if a third runway was given the go-ahead, it would take 10-12 years to be operational and it would not solve the existing aviation capacity gap.

(iii) Noise and air emissions - existing restrictions would prevent the airport from operating at its full potential. A recent study by the Massachusetts Institute of Technology found that a third runway at Heathrow would mean deaths resulting from airport emission at the Airport would increase from 50 deaths per year in 2012 to 150 in 2030.

5.10 A third runway at Heathrow is not a national aviation strategy and would leave policy-makers stuck in the middle.

5.11 Table 1 also reveals that with the right backing and clear leadership, the six largest airports outside the South East could add 116 million of passenger capacity to the network by 2050 (without any additional runways, but including Birmingham Airport’s extended runway). That amounts to nearly 50% of future demand.

5.12 Birmingham Airport believes the UK’s response to global aviation trends should be two-fold.

(i) In the short to medium-term - the Government should consider implementing the policies outlined in previous sections. This would enable airports outside the South East to attract enough passenger demand to make new high-value services economic for airlines and fully utilise airports’ spare capacity.

(ii) In the long-term - the Government should support and help market a network of national airports. Each major economic region should have at least one airport large enough to connect to very long-haul markets. Its function should be to maximise a particular regions competitive economic advantage. In the case of the Midlands, Birmingham Airport should be developed into the major international gateway for the UK’s productive sectors and export industries.

22 October 2012

Prepared 12th November 2012