Transport Committee - Minutes of EvidenceHC 78

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Oral Evidence

Taken before the Transport Committee

on Monday 19 November 2012

Members present:

Mrs Louise Ellman (Chair)

Steve Baker

Julie Hilling

Kwasi Kwarteng

Mr John Leech

Karl McCartney

Iain Stewart

________________

Examination of Witnesses

Witnesses: Sian Foster, General Manager, Government and External Relations, Virgin Atlantic Airways, Paul Simmons, UK Director, easyJet, and Simon Buck, Chief Executive, British Air Transport Association, gave evidence.

Q1 Chair: Good afternoon and welcome to the Transport Select Committee. Could we have, please, your names and organisations to help with our records?

Paul Simmons: My name is Paul Simmons. I am UK Director for easyJet.

Sian Foster: I am Sian Foster, General Manager of Government Affairs at Virgin Atlantic.

Simon Buck: Good afternoon. I am Simon Buck, Chief Executive of the British Air Transport Association.

Q2 Chair: There have been discussions about the Government’s approach to aviation. For a long time there have been complaints about a lack of strategy and inadequate capacity. What do you think is new about the current situation? Is anything new?

Simon Buck: The difficulty is that we have had a very long period of time where no decision has been taken. We recognise the political difficulties and realities of where we are, but we have had 30 or 40 years where decisions have been put off or not made. We believe it is vital for the UK’s economic prosperity that we have a policy that addresses the needs of all of the UK without continuing delay. We are where we are and we have the Davies Commission. We think the Davies Commission should be given time to do a full and proper study now to come up with the right conclusion, and the important thing is that that is then accepted by all political parties. The worst possible thing would be for us to have another period of indecision and to go back to a period of consultation after the decision has effectively been made from a considered view of the Davies Commission. We certainly don’t want another Roskill Commission.

Q3 Chair: What do you think the main principles should be in putting the strategy forward?

Simon Buck: Finding an aviation policy that meets the needs of the UK as a whole. It should be an integrated policy that looks at surface transport as well. It should look at the connectivity and the best interests of the UK. It should look at the interests of jobs and our ability to trade with the emerging economies of the world. That is vital for the UK’s prosperity going forward and to make sure that we don’t lose business to other European competitors.

Q4 Chair: What would the other witnesses like to add? What are your views about what is new about now and what should the Government be looking for?

Sian Foster: I would echo a lot of what Simon has said. This is an opportunity to have a very long-term consensus-driven policy on aviation that lasts beyond just one parliamentary term. That is important for the UK aviation industry and it is important for the UK as a whole. It would be very helpful for it to consider all aspects of Government policy as relates to aviation, including immigration, trade, taxation, jobs and skills, and all the areas of the economy to which we can contribute. It is also very important that this policy levels the competitive playing field for UK aviation.

Q5 Chair: Mr Simmons, what is your view? What is the most important thing to be looking at now?

Paul Simmons: One of the things we need to try and do is get an empirical view of the future. One of the things that has maybe changed or has been building up is a lot of noise in terms of various schemes and plans-I won’t name them all; you will be more than familiar with them in terms of aviation-and also having a joined-up policy. I haven’t really seen anything that is then connected to a business case or a study as to why that makes sense and what the future planning cycle looks like for air travel requirements. What we are looking for from this whole approach, and particularly the Davies Commission, is an empirically-based outcome, having fully looked at all aspects of various proposals, costed them and looked at the demand cycle attributed to them.

The other thing I want to say in opening is that we also believe that the debate has been far too focused on hubs. If you think about it, about 90% of air travel in the UK doesn’t involve a hub or hubbing through something; even about two thirds of Heathrow doesn’t involve hubbing. If we look at actual UK air passenger movements, most of them don’t involve a hub. Although a hub is clearly vitally important and getting the hub right is vitally important, most of aviation doesn’t require that.

Q6 Chair: We keep being told that the UK’s competitiveness is suffering because of inadequate capacity and the failure to develop a strategy. Do any of you have any hard evidence that that is the case?

Simon Buck: The only evidence I would point to, other than that which we have stated in our written evidence, is the evidence that we hear every day from organisations like the CBI, the British Chambers of Commerce, London First and other organisations representing business and others, who tell us that the lack of a proper capacity or strategy for UK aviation is damaging to the UK’s economic interests and to jobs.

Q7 Chair: Does anyone else have any examples that they could give us to show that we are suffering from a lack of competitiveness because of this?

Sian Foster: We can also consider it the other way round. What is the UK missing out on by not having a competitive aviation industry? How many jobs would have gone into building a third runway at Heathrow had that been allowed to go ahead? Previous estimates suggest it is 50,000 or 60,000, at a time when economic development is crucially important to the UK economy. We can look at it both ways. What are we missing out on internationally? How many fewer visitors are we getting? How many fewer jobs are there in aviation and in the supporting sectors as a result of having an uncompetitive policy here?

Q8 Chair: Mr Simmons, do you want to add anything or disagree with anything?

Paul Simmons: One of our favourite subjects is obviously APD. We have been asking for a long time for a fully costed study, ideally from the Treasury, to have a look at our belief that it is damaging UK plc as a tax.

Q9 Chair: We will come on to that later. I am looking for evidence now that we have lost out on competitiveness, if you think there is any.

Paul Simmons: I only raised APD at this stage because I think it is an anti-competitive tax.

Q10 Chair: We will be coming to that later. What I am seeking, rather than just statements and assertions, is whether there is hard evidence that the UK is losing its competitiveness because of an absence of aviation capacity or the lack of an appropriate strategy. I am looking for evidence of that rather than a statement that that is the case. Do you have anything that you could add to that debate?

Paul Simmons: Nothing at this point.

Q11 Kwasi Kwarteng: I want to ask about the 2003 White Paper. Clearly that is nearly 10 years ago. Is there anything that has happened in the last 10 years that you think the Government should take into account to alter the conclusions of that report?

Sian Foster: There have been huge developments in terms of noise-efficient and carbon-efficient aircraft. There have been big strides in the last few years. There has been a lot of work done by people like the Committee on Climate Change suggesting that aviation can continue to grow while delivering on the UK’s climate change targets. There are plenty of things and new evidence over the last few years that should be taken into account, but the basic evidence will be the same. UK aviation needs a strong and effective hub in order to compete internationally.

Simon Buck: I think that is right. It is very difficult to think of new evidence that can be produced. It is probably rather glib to say that many of us feel that we are suffering from consultation fatigue, but we have been consulted for many years and it is very difficult to find new arguments because the arguments are still the same as they have been. In terms of what evidence there is, as has already been hinted at, we should be looking at what we are missing out on. If we are to compete effectively with global and growing economies worldwide, if we don’t have routes or connections to those economies, then we cannot effectively trade with them because it is generally recognised that you are 20 times more likely to do business with a country if you have a direct air link with that country. There are many emerging countries to which we don’t have air links.

Q12 Karl McCartney: You were alluding just then to some of the issues-that our airports don’t have the capacity that others have. Can you give us any hard examples of airports in countries near to the UK where they have perhaps done something that we haven’t done in the last 10 years or longer that has given them the edge competitively or economically?

Simon Buck: I would probably say that they have built runways. If you look at Frankfurt, for example, they opened a new runway only last year. There is Schiphol. There are many hubs around Europe that have more runways than we do at Heathrow and as such they can attract routes. We are losing routes from the UK and from our hub airport as a result. Many of those routes are going directly to those new competitor airports that are emerging in northern Europe and taking direct routes from our hub airport.

I would say that it shouldn’t just be an argument about the hub airport. As has already been mentioned, it is to do with the UK’s connectivity. There are vibrant point-to-point airports as well that should be allowed to expand where they are reaching capacity. If we don’t do that, we are effectively shutting off the potential for new business to be developed from those airports to new destinations.

Q13 Karl McCartney: I understand about potential, but are there any hard examples of multinational firms that may have based their head offices somewhere else rather than in the UK because other places have better air links, whether because of new runways or whatever? Can you give us any hard examples of that?

Simon Buck: I am not in a position to reel off a list of names to you today, but certainly I am sure that many of the airports would be able to do that.

Q14 Mr Leech: What action could be taken to incentivise regional airports to take up some of the additional routes that are required?

Simon Buck: If you start from the premise that that is something feasible to do, I would, first of all, point to much of the work done in the form of analysis of passenger usage at London airports that shows that 75% or 80% of passengers using places like Heathrow or Gatwick do so because they either live within the catchment area of the airport or they are visiting London. It is probably not as simple as saying that there may be the potential for the regional airports to take up some of the capacity from that airport. There already is the potential for the airports elsewhere within the UK to take up passenger routes, and airlines place aircraft in those airports where there is the demand for those services.

Q15 Mr Leech: That wasn’t quite my question. What could we do to make it more attractive to airlines to fly to regional airports rather than just constantly looking at trying to get into Heathrow or other south-east airports?

Sian Foster: It is quite straightforward. If the market is there, we will deliver. We are commercially driven enterprises. If the market is there, we will fly from there; we would be stupid not to. If we look at, say, Manchester, there are 90,000 people a year who fly between Manchester and Hong Kong, according to CAA data. They go through a variety of different routes, be it through Heathrow by one of the European hubs or whatever-90,000 people. Our smallest aircraft has 240 or 250 seats on board. My maths isn’t great but that adds up to about 175,000 seats per annum. To justify operating that route, we would need roughly an 80% load factor to break even. That is a very rough order of magnitude. We would have a shortfall of roughly half the passengers that we would need in order to make that route commercially viable. While it is something that we would obviously keep under review, until the market is big enough, we can’t make that work or commercially sustainable.

Q16 Mr Leech: Is it not the case, though, that there are some emerging routes from Manchester and other airports and, if they can do it, why can’t you do it to other airports?

Sian Foster: Absolutely they can, and that is because those international carriers are connecting those passengers via another hub. An international carrier is spreading that passenger throughflow. For example, say, they are flying between Manchester and Dubai. The vast majority of those passengers probably won’t be finishing their journey in Dubai. They will be connecting from there to a range of other destinations. They are basically using the hub and spoke model, which is what we use at Heathrow to connect passenger flows from the US to Asia and the US to Africa. They are doing exactly what we do at Heathrow but just via an international hub.

Q17 Mr Leech: When we started this session a few minutes ago, Mr Buck was saying that we need to wait and see what the review comes up with and just accept what it says in the review. It appears as though you have all decided already that there is only one way of doing this and that is to flatten half of west London and have as many runways as we can get somewhere along the route of Heathrow.

Sian Foster: I don’t think that is what we have said. What Virgin Atlantic is looking for is one hub. We believe that one hub is needed for the UK to secure the UK’s competitiveness. We are looking to the Davies Commission to analyse all the different options based on their merits and make a recommendation that Government can take forward.

Q18 Mr Leech: But you are saying that you are looking at one hub, and that hub is Heathrow. You have already decided before that review has taken place.

Sian Foster: I was talking about Heathrow in terms of the current context. I don’t know where that hub is going to be. We are looking forward to finding out. We are looking forward to being part of the process to judge all the various options, but I think there needs to be one hub wherever that is.

Q19 Chair: There is a view sometimes that airports in the regions can accommodate flights that there is no room for at the hub at Heathrow. Are you disputing that aviation doesn’t work that way?

Sian Foster: The UK is very lucky in having a variety of different business models. I am sure that my colleague from easyJet will come on to this. There are a variety of different solutions for a variety of different business models. For an international scheduled carrier like us and like the international scheduled carriers that the UK is trying to attract, we need a hub. We need connecting passengers to make routes to emerging and established economies viable and competitive for the long term.

Q20 Chair: Mr Simmons, would you like to comment on this point? What needs to be done to encourage the use of airports in the regions?

Paul Simmons: We are the UK’s largest scheduled carrier and we don’t need a hub. We are flying from 18 regional airports already on over 300 routes from the UK. We have demonstrated that international trade is viable and profitable by serving all over the UK from the UK’s regional airports.

It is often said that there is room at Heathrow, but, if you look at some of the route development that has happened at Heathrow recently, I would urge the Committee to have a look at this. A lot of the extra capacity that has come up has been on traditional routes like north America or even Spain. A lot of the discussion is about the cities we are not flying to in China or Brazil. There are opportunities to fly to those places, but the airlines who are serving Heathrow chose not to do that. That was purely for commercial reasons and I have no reason to criticise them for doing that, but to say that capacity is scarce may be a bit of a moot point.

Q21 Chair: Where is there a problem with capacity? Is it for origin destination point-to-point passengers or is it to do with the hub airport? Where is the problem?

Sian Foster: The problem is that both those passenger groups travel on the same planes, for our business anyway. We also carry over 200,000 tonnes of cargo per annum in the bellyhold. A lot of that is UK exports. The leisure passengers, the business passengers, the cargo, the point-to-point and the connecting are all travelling on the one plane. Trying to separate them out and try different solutions at different airports would be very challenging, if not impossible.

Q22 Chair: Is the suggestion that you have different airports concentrating on leisure passengers and different ones on business passengers a feasible proposition?

Sian Foster: I wouldn’t say so, no.

Q23 Chair: Would anyone else like to comment on this point?

Simon Buck: I think that would be the wrong thing to do because it would affect the type of feeder traffic that would supply an airport if you were to split it away. If you were to look at something like traffic distribution rules, for example, there is a risk that you might simply deflect traffic away from the UK and it might fly to other continental airports where there were no such restrictions on the types of traffic that could use particular airports.

The answer, of course, is to make sure that an airport has the capacity it requires. That is not necessarily always at a hub airport. It can be elsewhere because there are plenty of other airports, particularly in the south-east of England, that are reaching capacity, and those are the sorts of things that we should be looking at to make sure that they do have the capacity they need for Britain’s future.

Q24 Chair: Where is the increased demand coming from? Is it from the business or leisure sector?

Simon Buck: It is from both of course. For example, the Government have a stated aspiration to increase the numbers of tourists visiting the UK. Aviation is a gateway for tourists coming to the UK. If we are going to see the numbers of tourists increase, we need to make sure that we have the airports to accommodate them.

Q25 Iain Stewart: I would first like to draw attention to my entry in the register of members’ interests. I would like to follow on the line of questioning that Mr Leech started about the issue between a hub airport and regional airports. I accept your argument that, within the current infrastructure, passengers and airlines will go where the market is, but that is very much looking at a static infrastructure position. Looking at our long-term capacity needs, is it not legitimate for us to consider, as well as one single hub, the concept of a split hub if-and it is a big, conditional "if"-you have efficient and fast connectivity between those? I don’t ask you to comment on any particular scheme like Heathwick or connecting Birmingham to Heathrow, but in general should the scope of the inquiry look seriously at this option?

Sian Foster: The inquiry and the Davies Commission should look at all options. Virgin Atlantic’s view, however, is that having a split hub would be like having no hub at all. If you are asking passengers to connect between terminals on to a train and then on to another airport, that is going to be quite difficult to market to overseas visitors when they could just connect between terminals at Schiphol, Frankfurt or Charles de Gaulle. We are always focusing our efforts on reducing minimum connection times so that we can be as attractive as possible to connecting passengers. We would be very concerned that adding a train ride into that mix would make it uncompetitive.

Q26 Iain Stewart: If I can just probe you on that, you say we should look at all the options, but you almost seem to be ruling it out as impractical at this stage. If you designed, for example, High Speed 2 and you had airside-to-airside transfers in 20 minutes between Birmingham and Heathrow-I accept that is a conditional "if" at the minute, but if it was designed in that way-could we not look at unlocking that spare capacity at Birmingham in the context of a split hub?

Sian Foster: If you could realistically compete on minimum connection times with continental European airports, including the immigration process, security and all that stuff, then the Davies Commission should absolutely consider it, but I struggle to see how that could happen.

Q27 Iain Stewart: To put it into context, what is the optimal connection time that we would be looking at?

Sian Foster: The optimal time would be under an hour from plane to plane, and well under an hour if you want to be truly competitive. As we are investing so much in all this new infrastructure, which the industry and its passengers will be paying for and therefore need absolute confidence in, we need to make sure we are at least as competitive as our continental competitors and not just trying to catch them up.

Q28 Iain Stewart: Mr Buck, do you have any views on this?

Simon Buck: I would endorse exactly what Ms Foster has said. It is absolutely essential that the connection between the flights will be under a certain period of time. If it is not, it will be a disincentive. However short the time is, if people physically think it is a long way from one place to another-as has been said, it is from one airport to another airport-that will be a disincentive to many people.

Q29 Chair: Is the UK market big enough to have two separate hubs with, say, BA at Heathrow and Virgin at Gatwick or something like that?

Simon Buck: We don’t believe so.

Sian Foster: No.

Q30 Chair: You don’t think the market is big enough.

Sian Foster: No.

Q31 Chair: Ms Foster, what problems have Virgin come across because of constraint capacity at Heathrow in developing flights to emerging markets?

Sian Foster: Heathrow has been full for the whole 28 years that Virgin Atlantic has been in existence. As soon as we were able to move over there in the early 1990s we did so. It has probably constrained our growth as a business. It has meant that we have had to fight hard to win the remedy slots arising from the recent BA takeover of BMI so that we can provide feeder traffic at point-to-point connections from Scotland to London Heathrow, but also providing options for feeder traffic to the rest of the world. It absolutely has an impact on my own business’s ability to grow.

It also has an impact on trade negotiations. When the UK Government go around the world trying to liberalise our services between the UK and third countries, I have heard time and time again those third-country Governments saying, "Until you can give us access to Heathrow and to your hub, then what’s in it for us? What’s in it for our airlines?" It has had an impact on the liberalisation of the global industry and on our business’s ability to grow, and it is continuing to have an impact on the UK’s competitiveness.

Q32 Chair: You have recently entered the domestic market.

Sian Foster: We have.

Q33 Chair: Is that so that you can provide feeder services to long haul?

Sian Foster: It is a combination. A large number of passengers fly down from Manchester, Aberdeen and Edinburgh to Heathrow for point-to-point services. There are also at least two thirds of them who connect on to services to the rest of the world. We wanted to be able to provide competition domestically but also competition for people wanting to fly from Edinburgh to Los Angeles, Shanghai or Johannesburg.

Q34 Chair: Mr Simmons, is a hub airport essential for your operation?

Paul Simmons: No; we don’t use the services of hub airports. We are completely a point-to-point airline. That has been the basis of our growth over the last 15 years.

Q35 Chair: How does constraint hub capacity restrict competition between airlines?

Simon Buck: A new entrant would effectively have difficulty developing new services. While they may be able to get some slots, they may not be able to get slots at a particularly attractive time of the day. It may mean that incumbent airlines could dominate with the slots that they have at an airport. It leads to anti-competitive behaviour if an airport is slot-constrained. If you want to make sure that won’t happen you need to have plenty of capacity available at an airport.

Sian Foster: I can use a recent illustration if that would be helpful. Virgin Atlantic recently relaunched our services from London Heathrow to Mumbai. We operated that route about 10 years ago. We shut it down in 2005 because we couldn’t get connecting passengers timed on to the right services on to New York. There are huge passenger flows between India and the east coast of the US, but, unfortunately, because of the constraints in capacity and our inability to get the right time slots to connect passengers between our India services and our east coast US services, we lost out on that transfer market. We have recently relaunched the services at a better time of day so that we can absolutely take advantage of that. That route will be more sustainable for point-to-point passengers between the UK and India and vice versa but also between India and the US.

Q36 Chair: Would the deregulation of airports in the south-east facilitate the use of additional capacity? Mr Buck, would that make any sense?

Simon Buck: No, we don’t think so. We think deregulation would not be the right way to go. We think that airports act as local monopolies and the best way is for them to continue to be regulated in the way that they are.

Q37 Chair: Mr Simmons, does that have any impact on you?

Paul Simmons: We would agree with that. We believe they have market power and that regulation is the best way to maintain the best value for the consumer.

Q38 Karl McCartney: I want to go back to Mr Simmons and whether you use hub airports or not. Do you have any figures for the passengers you do take? You might not yourself, as a business, go out searching for those passengers, but because of the nature of your business quite a few people, I think, from my own personal experience use your airline to get to other services elsewhere.

Paul Simmons: We have not been capturing the data, although we are taking a more active interest in it. We do know that a lot of people connect through particularly, say, Gatwick, where we now have 100 routes coming down from various places in Scotland, Northern Ireland and also from Europe, and then connecting on either through us or someone else. We do know it happens.

There is also an interesting development that you may not have seen. In Milan’s Malpensa Airport they have a thing called ViaMilano where the airport is acting as the hub agent. Rather than the airlines doing it themselves, the airport is facilitating it so that the passengers can get round different airlines easier. That is an interesting thing that we are keeping an eye on. In a point-to-point way, that is a way to connect different point-to-point airlines.

Q39 Karl McCartney: Is that like having a secure side that they don’t have to go through?

Paul Simmons: Currently we have to go landside but there have been some thoughts about keeping it all airside. It is just a different way of doing a connecting service. It doesn’t always have to be the airlines that do it themselves; it could be the airport in future.

Q40 Chair: Mr Simmons, are your services operating as feeder services to European hubs?

Paul Simmons: Aside from Heathrow and Frankfurt, we fly into pretty much every major European hub. Apart from that, whether it is CDG, Gatwick or Milan Malpensa and so on, we fly into those places in pretty heavy frequencies. We do know that people will be connecting on but we just don’t facilitate that for them; they do that themselves.

Q41 Steve Baker: To what extent do trends in aircraft design put pressure on hubs, Mr Buck?

Simon Buck: By "trends in aircraft design", do you mean them becoming larger perhaps?

Steve Baker: Yes.

Simon Buck: Inevitably an airport will have to be designed to handle particularly large aircraft. One might feel that, the larger the aircraft, the more efficiently you use scarce runway capacity, for example, but we must remember that, because of the way the hub works with feeder services, you can’t just make every aircraft that uses a hub airport a very large aircraft. By definition, there would not be the feeder services coming in and out of that airport if every aircraft was a very large aircraft. There needs to be a mix of types of traffic for a hub airport to operate efficiently.

Q42 Steve Baker: Ms Foster, when you were discussing the route to Hong Kong and talking about utilisation rates and so on, is a tendency to operate from larger hubs something that you see with aircraft getting bigger?

Sian Foster: I don’t think that aircraft necessarily are getting bigger. Obviously we have the super jumbos like the A380, which are substantially bigger than competitors in the market, but there is a variety of different sized long-haul aircraft now available. We will be taking on the Boeing 787s in the not too distant future and they are not a big aircraft by any stretch. They are substantially more fuel-efficient. They are a lot quieter with a 60% smaller noise footprint than the planes they will replace and they have a really nice cabin environment for our passengers. There are big changes in aircraft design that change the economics of operating a route because fuel is a considerable cost to airlines, but I don’t think it is just because they are bigger. There is a variety of different things at play.

Q43 Steve Baker: Mr Simmons, your evidence in relation to hubs has been significantly different from the others. Could you just characterise why it is that you believe your business model is significantly different so that you don’t need a hub?

Paul Simmons: Because we don’t offer long-haul connecting services. In total, easyJet now has 600 routes across Europe, north Africa and the middle east all flying point to point. That is just the way that we have chosen to develop our business. As I mentioned before, we are now by quite some margin the UK’s largest airline in terms of passengers flown. It works and it doesn’t use the services of hubs. Although we do fly into hubs-and no doubt some of our passengers get off and connect on to a long haul-we don’t do that ourselves.

Q44 Steve Baker: What do you think the trends in demand will be for the kind of business model that you are offering?

Paul Simmons: We have only seen the demand for our type of business model grow, and the success that we have had over the years is not only just growing but growing profitably too; we see that continuing. Clearly we are not divorced from industry. We do recognise that there may well be an issue and we welcome the Davies Commission wholeheartedly in terms of having a proper look at this, but it needs to be a costed response that doesn’t put the cost on to the passenger for capacity that may not be required. Overall, we are in favour of what is happening at the moment.

I would say one other thing. In terms of trying to alleviate some of these capacity concerns, there is a project at Luton airport already to raise their capacity from 10 million to 18 million that could be, to use a horrible phrase, shovel ready within a couple of years, if not sooner, which may alleviate some of the pressure in the south-east at least while these bigger decisions are taken.

Q45 Steve Baker: Would that project be privately funded?

Paul Simmons: Yes.

Q46 Mr Leech: Are there any international examples of where Governments have manipulated the market so that they have invested in a particular airport to try and expand services there where they have had capacity constraints elsewhere?

Sian Foster: Yes; in Tokyo at Narita and Haneda airports. The Japanese Government have tried to make Narita the international hub for most of the day and Haneda the local regional hub for most of the day. They have a bizarre rule where they switch over some time during the evening and it is incredibly complex. In the time that they have been trying to enforce these rules locally, they have seen Japan’s primacy dip as an international hub for south-east Asia. They have been overtaken by other airports in that region so it hasn’t worked particularly effectively for the airlines, the passengers or the Japanese economy.

Q47 Mr Leech: Is that because it hasn’t worked effectively or the competition has been better?

Sian Foster: It is very difficult to separate them, I guess, but, when you have short-haul passengers connecting on to long-haul services and business travellers travelling on the same flights as leisure travellers, you need one hub in order to bring all those people together to make the routes as sustainable as possible.

Q48 Kwasi Kwarteng: I want to ask a question with regard to what Mr Simmons said earlier about being in full agreement with what is happening now. What is happening now that you are in full agreement with?

Paul Simmons: Going back to the very first question you asked in terms of what has changed, so many ideas have been floated about extra capacity and ideas for fulfilling extra capacity without anyone empirically demonstrating that the extra capacity is required. It probably is but no one has said, "Here is exactly where it is required and here is how to fill it." We are kind of hoping that the Davies Commission will answer those questions and also go on to say what the most cost-effective way is to fill those capacity demands.

Q49 Kwasi Kwarteng: How did the 2003 White Paper not answer those questions?

Paul Simmons: To be honest, I am not completely familiar with the 2003 White Paper. The other thing I would say, though, is that in the last 10 years the industry has changed significantly.

Kwasi Kwarteng: Sure.

Q50 Chair: Should there be variable air passenger duty rates outside the south-east?

Simon Buck: No; we don’t believe there should be. If you are talking about demand management by introducing variable air passenger duty rates, we think you would effectively make certain airports more expensive, and logic might suggest you would make the airports in greatest demand the most expensive, which would therefore be airports in the south-east. What might happen then is you just deflect further traffic away from those south-east airports to overseas airports, and you may find that by so doing you are simply exporting routes and jobs to the near continental hubs.

Q51 Chair: Are there any different views from that? You have the same opinion.

Sian Foster: No; we have the same view but it is interesting that there has been a lot of talk recently around devolution of APD to Scotland and the other devolved regions. The reason for that is because they recognise that it has an adverse impact on their competitiveness as a tourist destination and a destination for business travellers. All the points that we would make are true on behalf of the UK as a whole. We have been calling on Government to do its own economic study to see what the true cost of APD is to the UK economy.

Paul Simmons: The best thing is to abolish it rather than try and change it.

Q52 Chair: Would you be opposed to variable charges?

Paul Simmons: Yes, if I can briefly explain why. Certain markets within the UK are shared catchments if you look at where people come from to take the flights. There is a great deal of overlap, for example, between Edinburgh and Newcastle or between Cardiff and Bristol. If they had differential rates, it would manipulate the market, we believe unfairly, at the expense of whichever airport had the higher charge.

Q53 Iain Stewart: I want to pick up on Mr Buck’s point. I accept that, if you made Heathrow, say, more expensive with APD than it is now, then that could lead to a loss of market share to Charles de Gaulle, Schiphol, Frankfurt or wherever. However, if the APD stayed at the same rate for Heathrow but you discounted it in the regions, do you still think that effect would happen?

Simon Buck: I think that would amount to a cut in overall tax take from air passenger duty. We certainly believe that the air passenger duty should be, if not abolished immediately, reduced significantly. We think air passenger duty is damaging per se. I don’t see that it would have any great advantage by reducing it in one particular area. Let’s remember that for domestic routes you pay tax at both ends of the route, which is particularly damaging.

Q54 Iain Stewart: Forgive me, that’s not really the question I was asking. If you discounted it elsewhere but did not increase it at Heathrow, are we not likely to attract more business to those other airports?

Simon Buck: This is what we would like the Treasury to do: we would like them to carry out a proper study of the effect and impact of air passenger duty. The simple fact is that none of us know. We can all speculate, but, until and unless there is a proper authoritative study carried out into the impact of air passenger duty, none of us know. We believe that the imposition of air passenger duty actually causes a loss of jobs. The World Travel and Tourism Council say that 91,000 jobs are lost as a result of the imposition of air passenger duty and approximately £4.2 billion of revenue to the UK economy, which otherwise would be earned.

Q55 Iain Stewart: Would you be happy for this review to look at the possibility of regional variations, as long as there is a discount?

Simon Buck: We would certainly like a full review carried out into the impact of APD.

Q56 Kwasi Kwarteng: My question is slightly mischievous but directly related to APD. If you could choose between abolishing APD and increasing capacity-it is a binary choice-what would you do?

Chair: Be silent.

Sian Foster: I would have to have a bit of a think, I’m afraid.

Q57 Kwasi Kwarteng: Does anyone else want to say anything?

Simon Buck: I am not aware that we are ever likely to be presented with that question.

Q58 Chair: I think that’s a good answer. Mr Simmons, do you want to give an answer to that?

Paul Simmons: No; I am okay on that one.

Chair: You might be wise.

Q59 Mr Leech: At the beginning Ms Foster mentioned that it is difficult to establish new long-haul routes from other airports outside the south-east. Would an APD holiday, in terms of phasing in APD on new long-haul routes at regional airports, have the same damaging impact that you talk about in terms of variable APD?

Sian Foster: To go back to my earlier answer, the market is just not big enough on a point-to-point basis to fly from, say, Manchester to Hong Kong to justify a daily long-haul service, unless you are connecting passengers via an international hub to other points as well. I don’t think having a reduced rate of APD outside the London area would make much of a difference to that, to be honest.

Q60 Chair: What should the Government and the industry do to encourage improvements that would alleviate pollution from noise and emissions?

Simon Buck: I would say that the aviation industry is already looking at a range of initiatives, particularly through Sustainable Aviation, to bear down on its emissions such that by 2050 we will have an absolute reduction in net emissions compared to 2005. We are hoping to do the same sort of work on noise.

I have to say that Governments have a role to play in terms of people being exposed to aircraft noise through the failure of the planning system, which has allowed many noise-sensitive developments in areas surrounding airports. If you look at Heathrow, for example, looking at their 2009 noise contour, they have seen a 16% increase in the number of households in the area compared to 1991. That is a direct failure of the planning system, in that it has allowed more and more development in noise-sensitive areas, which has effectively exposed people to more aircraft noise in the direct opposite objective of the Government now, which is to reduce the numbers of people exposed to aircraft noise.

Q61 Chair: Does anyone else want to give any views on what Government and industry can do to reduce noise and environmental pollution?

Sian Foster: As I mentioned before, we are investing in new aircraft with substantially smaller noise footprints than what has gone before. Even though our business will grow, our absolute noise output will peak and actually decrease over time. What is very important is that we work with local communities, other stakeholders and other bits of the industry such as the airports, air traffic controllers and the engineer frame manufacturers to look at perceptions of noise and what could be done to alleviate noise impact on local populations. That could be by different routeings and different predictability versus having noise less often and looking at all those different options, analysing them on their merits and taking everyone’s view into account so that we can have a very well-thought-through and well-evidenced noise policy going forwards.

Paul Simmons: I agree with what has been said, but I would add that clearly it is very important that the emissions trading scheme works and sticks. We were advocates of that before it started. It has now been going 11 months and we obviously want to make sure that that does stay as the way the industry compensates for the emissions that it creates.

On noise and emissions, we now have a fleet of 210 aircraft with an average age of about four and a half years. We believe that using new technology is the way to reduce both noise and emissions, as has been mentioned before. We do work via airports with local communities in terms of listening to what people are saying on the ground who are affected by airports and aviation in terms of how we can alleviate where we can. There are a number of things, but we take it extremely seriously and are as active as we can be.

Q62 Julie Hilling: I want to ask another question about the environment. One of the other big issues around airports, of course, is the environmental cost to people of getting to the airport, including staff. Do you think the airlines have a role in doing something about that and what have you been doing about that?

Sian Foster: Yes; we all have a role to play in improving surface access to airports. We are encouraging our staff and our customers to travel to work and to their flights via public transport, if possible. A multi-modal transport policy for the UK that integrates aviation, rail, bus and road would be very helpful for all of us.

Q63 Julie Hilling: Do you think you have a role in financially supporting that improvement?

Sian Foster: To an extent the passengers already do.

Q64 Julie Hilling: I am talking about the airlines though. Do the airlines have a role in supporting that development?

Sian Foster: It is one and the same, in that passengers and airlines pay charges to the airports.

Q65 Chair: Are you saying the work the airlines do is reflected in the charges that the passengers pay?

Sian Foster: We have our own staff travel policies that encourage people to use public transport, car-share, cycle to work and all that kind of stuff. It also needs to be done on an airport-wide basis to really get the big results. That absolutely does happen at airports around the country.

Simon Buck: I have to say, if I may, that the Government have a big role to play in this as well and so do other operators-rail operators in particular, for example. If you look at what is happening at Gatwick airport with the Gatwick Express, that service used to be a world leader in terms of a non-stop service between the airport and central London. It has now been slowly degraded, effectively becoming a stopping service on the route from Brighton. It is making it much less attractive with inferior rolling stock. In terms of making it something that people want to use to get to the airport, people have much less incentive to want to use it now than they might have done in the past and are far more tempted to use their cars.

Paul Simmons: I completely agree with that. What is happening with the Gatwick Express and what may happen in the future is extremely worrying. As you said, it was very successful. It was almost akin to the Heathrow Express in terms of service. It has now basically been subsumed into a commuter service. If you get on in the early morning at Gatwick, you are going to meet thousands of friends from Brighton, which is not a problem, but it is if you are just trying to get in and out of the airport. If we are serious about having a multi-modal service, then you need serious train services and serious road access strategies. The train service in particular is just not thought through. I am thinking mainly about Gatwick here but there is also the Stansted Express, which is a stopping service, and our new experience with Southend airport, where we can’t get people in there in time for the first wave because the trains don’t arrive in time. We need help, and particularly Government help, to make sure that happens.

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

<?oasys [pg6,cwe1] ?>Examination of Witnesses

Witnesses: Michael O’Leary, Chief Executive Officer, Ryanair, Dale Keller, Chief Executive officer, Board of Airline Representatives in the UK, and Otto Grunow, Managing Director, Finance Europe and Pacific, American Airlines, gave evidence.

Q66 Chair: Good afternoon, gentlemen, and welcome to the Transport Select Committee. Could we have your names and organisations, please?

Otto Grunow: Hi, I am Otto Grunow. I am the Finance Director for American Airlines in Europe and the Pacific.

Michael O’Leary: I am Michael O’Leary. I am the Chief Executive of Ryanair for Europe and the rest of the world.

Dale Keller: I am Dale Keller, Chief Executive of the Board of Airline Representatives in the UK.

Q67 Chair: There have been discussions about aviation and the need for a strategy for a long time. What is so special about that situation now? Does anybody have a view? What has changed?

Otto Grunow: I will jump in if that’s okay. I was sitting in on the prior panel’s discussion on that. The thing that I could perhaps add to the debate or discussion about new developments in the last decade or so is the extremely prominent development of alliance services and hub and spoke carriers becoming truly global in scope. For example, in the case of American Airlines, along with our partners locally-British Airways and Iberia in Spain- we are competing very directly against alternative alliances hubbed at CDG, Frankfurt and Schiphol. The public policy debates that we have been discussing and seeing play out within the current aviation framework discussions about hub airports and one hub versus two hubs-all of those things-are replicated by the business models that have developed between hub and spoke carriers. In the last 10 years we have very much become even more hub-intensive and seen more and more the value and necessity of hub connectivity between ourselves, for example, and our alliance partners.

Q68 Chair: Do any of the other panellists want to comment on what is new now? Is it an urgent situation now?

Michael O’Leary: Speaking for Ryanair, which is the largest airline in Europe-this year we will carry 80 million passengers-we very much welcome the development of an aviation strategy here in the UK. Sadly, we haven’t seen one for about 10 or 15 years and we are still waiting for one. We don’t join in the consensual wonderful welcome for the Davies Commission, which is just another example of the UK kicking the aviation strategy can further down the road. To us, it seems to be a relatively simple issue of developing more runways in the south-east and developing them quickly. Instead of faffing around worrying about hubs and point-to-point, we should create excess runway capacity for the south-east, which would allow us to reverse five or six years of traffic and visitor declines and create an environment where aviation in the UK, or at least the development of a coherent aviation strategy in the UK, would allow <?oasys [pc10p0] ?>the industry to grow visitor numbers, tourism and jobs. We regard most of the other issues as subsidiary.

Q69 Chair: Mr Keller, you say in your written evidence that aviation should be market-driven. Does that mean the Government don’t have a role to play?

Dale Keller: The industry is already highly regulated, particularly from the Civil Aviation Authority through the DFT. What we are saying is that there shouldn’t be regulation whereby the Government are dictating where airlines should fly. Let the customers decide where the airlines can actually operate services.

Q70 Chair: You say also that foreign airlines are bypassing the UK because of capacity constraints at Heathrow. Can you give us any examples of that?

Dale Keller: This is simply because of the hub situation. We have heard from both easyJet and Ryanair that their models aren’t really based on hubs and that works perfectly well, but if you are a long-haul airline that isn’t flying to a hub you absolutely have to have that connectivity. If Heathrow, which is our current hub, is full, you would have to pay absolute millions to get a slot, and even then you may not get the timings that you require. Airline scheduling is a massively complex issue. It is not just about an airline having an aircraft available. It has to be available at the specific times that suit the arrival and departure. That is what is making the access into the UK’s hub so uncompetitive at the moment compared with the airports in Europe and the middle east, where there are freely available slots at times that are competitive without paying millions and millions of pounds to purchase them.

Q71 Chair: Can you give me any examples of routes that the UK has lost because of the lack of hub capacity?

Dale Keller: A lot of that is commercially sensitive to an individual airline. What we are aware of, with a survey we did of 86 airlines late last year, is that 53% are currently scheduling flights to other routes that would have come to the UK. This survey, which went to the head offices of those airlines, found that 86% would seek to add additional capacity into the UK’s hub of Heathrow if it was freely available; so it is really the lack of opportunity.

There have been some long-haul routes tried into other UK non-hub airports, which simply have not been successful or sustainable. We had the loss of Hong Kong Airlines this year. They launched a Gatwick/Hong Kong service. AirAsia X haven’t been successful with their long-haul operation out of the UK, which again wasn’t from the hub. Stansted has been tried a number of times transatlantic and it has always failed. There is a lot of demonstration that the long haul doesn’t work without the capacity in the hub. The short-haul model can work from non-hub airports.

Q72 Chair: You have spoken about Hong Kong Airlines. Are there general concerns about the viability of routes from Gatwick to emerging destinations?

Dale Keller: For what we deem a long thin route, where you are not operating into a hub or where you don’t have the ability to hub the passengers at this end in the UK, yes, there is absolutely a viability issue.

Michael O’Leary: If I may just add an example there, in Ryanair we have grown from 40 million to 80 million passengers in the last five years. At least half of that growth could have been placed in the UK at Stansted and at other UK regional airports. Most of it has been lost by Stansted and the UK regional airports through a combination of the uncompetitiveness of APD and airport charges, particularly at Stansted, where you have had a failed regulatory regime providing an inadequate service for consumers. That is something that has now been identified by the Competition Commission, which is why they forced the break-up of the failed BAA monopoly.

Q73 Chair: Do you think that is the problem rather than capacity?

Michael O’Leary: Both. In each of the last five years we have offered Stansted an additional traffic growth, but there are real congestion bottlenecks in the south-east airports-that is, the morning peaks-when effectively Gatwick, Stansted, Luton and Heathrow are full. Yes, there is spare capacity at Stansted, but it is in the middle of the afternoon. Gatwick is empty in the evenings, but unless you can base aircraft in there in the morning peak you can’t grow those airports. Not alone do you have a congestion problem; you also have a lack of competitiveness problem. That does dramatically impact on the growth of the UK airports. We would have grown in the UK by about 20 million passengers over the past five years were conditions right for us to do so. Instead, you have lost that growth to other countries like Spain and Italy, which aren’t exactly competitive, but they are a damned sight more competitive than the UK’s airport regime.

Q74 Chair: Mr Grunow, did you want to comment on this point?

Otto Grunow: I could add another example. In the case of American Airlines, since about 2008 we have added capacity to Spain by 28%, while at the same time our capacity to the UK has been flat or slightly negative. Some of that reflects the fact that, again, in this alliance-competitive world, where there are opportunities to take very mobile assets like aircraft, move them on to routes in short order and flow traffic over alternative hubs, there is an opportunity for us to use a hub with much more capacity like Madrid to take transfer traffic that is going from continental Europe, especially in the southern tier of Europe. Obviously, anything south of Paris latitude can flow quite well over Madrid. That doesn’t mean that we lack a commitment to Heathrow. We have tremendous investment in Heathrow and in the UK hub. We employ 1,000 people in the UK. We have 20 services a day. I think we are the largest US carrier by far. But, like any business, we will need to have alternative business models. We do see a problem in the UK’s ability to reach consensus around the importance of a hub and the fact that it needs to be a single hub. That is a bit of a commercial and competitive response.

Q75 Mr Leech: Mr O’Leary, you were pretty clear in your first response that your view is that we need to build more runways in the south-east. Do you have a view on where those runways should be and how many there need to be?

Michael O’Leary: Yes; at least three-one at Heathrow, one at Gatwick and one at Stansted-as fast as possible.

Q76 Mr Leech: Do you have any view on the proposal to create a brand new airport?

Michael O’Leary: Yes.

Q77 Mr Leech: Would you like to share that with us?

Michael O’Leary: In parliamentary language it would be unprintable, but it is insane, stupid and hare-brained. London is served currently by five airports. Some airports serve London better than others, but at least you have the ground transport infrastructure and people who live around there. To try to come up with a new greenfield runway regardless of where you are going to develop it, which has no infrastructure, no motorway or rail infrastructure, which will probably take the rest of my lifetime before it sees the sight of day, is insanely and asininely stupid. It is a worthwhile proposal because it generates lots of PR inches here.

London has the benefit of being supported by multiple airports. You already have that transport infrastructure in place. You have the land at each of those airports for an additional runway. You don’t have to knock down houses to do it. Get on and build three more runways. What you don’t want to do is have one more runway.

The problem with UK aviation is that it has been bedevilled for the last 30 years by the BA monopoly, which specialised in constraining the delivery of runways so that they could keep overcharging airlines and passengers for it. You have a unique opportunity now, early next year, when Stansted is sold. You will have three competing airports. The first thing they will all do is start campaigning to develop an additional runway at their airports. Government should support that. Let’s promote three additional runways and, there we go, we have binned a lot of this nonsensical debate for the next 20 years.

Q78 Mr Leech: But, if we build an extra runway at all three of the airports, how quickly would it be before we would then be talking about the need for a fourth runway at Heathrow?

Michael O’Leary: I would say it would take 10 to 15 years to get three runways at all three airports. It will be another 30 to 40 years before you would be worrying about another runway.

Q79 Mr Leech: Finally, you mentioned that you could have expanded business at Stansted-

Michael O’Leary: Would have.

Q80 Mr Leech: -would have expanded business were it not for the congestion in the morning peak.

Michael O’Leary: No; that was one of the factors, and the pricing model at Stansted.

Q81 Chair: It was pricing as well.

Michael O’Leary: It was pricing at Stansted.

Q82 Mr Leech: Recently there were announcements about expanding services at Manchester. Why is it that you have been able to expand services at Manchester but not at Stansted?

Michael O’Leary: The great thing about Manchester, thanks to the increased competition it has received from Liverpool in recent years, is that there is a much more practical management team at Manchester that now discounts and provides low-cost growth agreements, sometimes at off-peak times of the day or during the winter off-peak period, and they are very anxious to grow. To be fair, that didn’t exist at Manchester before Liverpool really got serious about 10 years ago and put a proper terminal and airport in place. The benefits to the north-east of having real credible competition between Liverpool, Manchester, east midlands and, to a lesser extent, Birmingham have been very real and very tangible. Average airport fees have gone down in the north-east.

In the south-east, where you have had constraints-

Mr Leech: The north-west.

Michael O’Leary: The north-west, sorry. I am Irish, so my geography is always a bit dodgy. In the south-east, where you have had no excess capacity and you have had a Government privatised monopoly constraining capacity for the last 20 years, charges have been rising appreciably ahead of the rate of inflation in recent years. Stansted costs have doubled in the last five years and that was 16 years of consecutive traffic growth through three recessions. Traffic has declined by 25% in the last five years.

Q83 Chair: Do you consider Liverpool to be a good place for your operation?

Michael O’Leary: I think Liverpool is a wonderful place for our operation. It is a very good airport, with very good infrastructure. It has a model new terminal building, which, unlike in the south-east, they built for about 25 or 30 million quid and it works. It has had a wonderful and very salutary effect on the management at Manchester. As a result, the north-west has a much more competitive air transport infrastructure than the mess, fudge and dither you have here in the south-east.

Q84 Kwasi Kwarteng: I am very interested to hear your trenchantly-put views on capacity, but, if you had to have a choice between the three runways, would you have a view as to where you think the extra runway should be?

Michael O’Leary: Of course I would. I would have the extra runway at Stansted because I am the biggest airline at Stansted, and I would have the extra runway at my airport. BA would want it at Heathrow and easyJet would want it naturally at Gatwick. I am slightly arguing against myself in giving you a visionary aviation strategy for the next 30 years and saying, "Don’t listen to the airlines; just stick an extra runway at all three airports and let the market sort it out." You will have excess capacity. You will have three competing airports with excess capacity. You will have three privately owned airports competing for airport growth. All of a sudden, instead of this nonsensical CAA regulatory model where everything is cost plus, the airlines will no longer have to worry about the capex. There will be real competition and excess capacity between the three main airports in the south-east.

Q85 Kwasi Kwarteng: You don’t think the excess capacity is wasteful.

Michael O’Leary: No. Excess capacity is absolutely critical. It is what drives competition, it is what drives down costs and drives a better deal for passengers for both the UK going abroad and for visitors coming here. You will get away from all this messing with hubs and point-to-point and all the rest of it.

Q86 Iain Stewart: This is a question primarily to Mr O’Leary but certainly I would be interested in the others’ views as well. It picks up on a comment that our witness from easyJet made in the last session. They are seeing a growth of their markets to continental hub airports to feed long-haul flights. Is that something that you are seeing in your business?

Michael O’Leary: At the risk of not being generous to easyJet, a lot of their growth is at expensive hubs in continental Europe because that’s where they can avoid competing with Ryanair. We see growth both in continental hubs and continental point-to-point secondary and regional airports. We are still the fastest growing airline in Europe. We see inexorable growth for the next five or six years. The growth opportunities are speeding up as the flag-carriers-Iberia-go through a massive restructuring. Now it looks like it is cutting 25% of its short-haul capacity. SAS looks like cutting about 25% of its short-haul capacity.

If you go back to the 2003 White Paper, it is now an historical and largely irrelevant document because it was drafted at a time when BA was the world’s favourite airline and everybody was going to hub through Heathrow. BA is now not even the UK’s favourite airline-actually perhaps not even the UK’s first two favourite airlines. Ryanair is the UK’s favourite airline and easyJet is the UK’s second favourite airline. It is not about hubs; it is about creating excess capacity here. With excess capacity at three competing airports, you will then create an environment where, whether you are a hub airline like American delivering very few passengers, or you are a point-to-point airline like Ryanair delivering huge volumes of passengers, jobs and visitors, you can cater for both.

Q87 Iain Stewart: Can I ask the other witnesses?

Dale Keller: Our membership encompasses 82 airlines, including Virgin Atlantic Airways and British Airways. We take a broad view. I agree with everything that Mr O’Leary has just said because I believe the south-east is where we have the capacity problem. If we look at it very simply, we have five airports with six runways. There are a lot of issues about where we are inefficient or not competitive in the UK. It is in the planning that we are not efficient. Our ability to utilise that capacity as an industry is acclaimed worldwide. Gatwick is the busiest single-runway airport in the world. Heathrow’s ability to use two runways on a small piece of land is completely unmatched anywhere. Let’s not hit ourselves on the head that we are not doing a good job.

Adding another runway at an individual airport except at a hub by having three doesn’t solve our hubbing issue where we can bring in particularly more long-haul services. Those are the services we need to get into the competing growth markets in the far east and Latin America. We believe that, yes, adding three new runways like Mr O’Leary has said would be fantastic, but the reality is that we need at least one airport that has three or more runways.

Otto Grunow: I would generally agree with what both of my colleagues have stated. On the airport cost issue, we agree that there is a tremendous amount of operating cost pressure at places like Heathrow. Of course, being competitive as a hub is not just a question of having sufficient transfer traffic, a sufficient number of destinations and lots of spokes to feed the long-haul service. It is also about the customer experience and the quality of the airport itself. What do those terminals look like? What are the operating expenses that are being placed on the airlines that are trying to serve those hubs?

Recently we have had proposals come out for operating expense commencing in April 2013. There are increases at Heathrow of 35% on landing fees and 56% on aircraft parking. These are enormous operating problems. I agree that a market mechanism such as competition between airports with excess capacity would perhaps be a very clean solution, but, in the absence of that, I think it is probably a question of regulatory vigilance as well.

Michael O’Leary: But the problem is that we have regulatory vigilance here in the UK by a regulatory authority that even the UK’s Competition Commission has discovered is inadequate, unfit for purpose and has singularly failed to promote competition or the consumer interest in the last 20 years.

Chair: I think you have made your views pretty clear on that, Mr O’Leary, as on other things.

Q88 Julie Hilling: I want to pick up a couple of points that people have raised. Mr Keller said that regional airports can’t sustain long-haul flights, but that doesn’t appear to be the case in Manchester, for instance, where it is sustaining long-haul flights.

Dale Keller: Proportionately it is a very small number. The only long-haul services that are sustainable, excluding the hub, are to other hubs. A number of our members are taking great advantage of the fact that it suits their business model to operate from Manchester, Newcastle or Glasgow into their hub. I don’t think it is any secret-and they would agree with me on this-that that suits the economy of their country, but it doesn’t suit the economy of the UK. It is time for the Government to make a decision. Do we want a part of this global business? Do we want to maintain the UK’s role as the pre-eminent aviation hub in the world or are we going to have a gradual dissipation of that to other competing hubs?

Q89 Julie Hilling: Does the question not arise in terms of where passengers are coming from and where people want to go to? I recognise that a lot of people want to come to London, but when you look at the population in the north-west I think Manchester talks about serving almost as many people as Heathrow would serve of that destination. Does that not come into those arguments at all?

Dale Keller: Yes, you can serve a number of destinations through that overseas hub. That doesn’t generate a great number of jobs in the UK. You are giving the customer a choice of those airports but they are not getting a great choice. They are virtually being pushed into one or two airlines. The great danger of this capacity is that there is a reduction in the number of regional services into our current hub of Heathrow, which is therefore embracing the pushing offshore of that connecting traffic. Instead of flying, say, from Newcastle to Heathrow to Sao Paolo in south America, the ability for them to go through a continental hub is greatly increased. There are some choices but it lessens the choice of airlines, so I believe it does have an impact on the competitive situation and choice in the market for the consumer.

Q90 Julie Hilling: You talk about that great competition from some continental hub airports. Is there still an endless capacity in Frankfurt, Charles de Gaulle and so on, or are people then looking to develop other hubs? Somebody was talking about Madrid. What is the capacity like in those hubs?

Dale Keller: There are from four to six runways in those hubs. Like I said, we have our six runways in the south-east but they are not in one place, so it doesn’t create a hub. By having between four and six runways in one point and a home-based carrier with a large network, that allows all the other foreign airlines that aren’t feeding a hub to come in and actually enjoy that, particularly these days when we have a lot more airline alliances in place.

Q91 Chair: Why can’t there be a virtual hub? You say in your written evidence that that wouldn’t work.

Dale Keller: I think the word "virtual" says it all really. We are all individuals and we all fly. If I was living in Newcastle and I had the option of flying into Heathrow and then taking a train journey between there and Gatwick or Stansted, or wherever, it wouldn’t be appealing to me, and I doubt it would be appealing to yourselves if you ask yourselves honestly. Ultimately we have to provide what the customer wants. The European hubs can provide a 45-minute minimum connecting time. A virtual hub would be 100 minutes at the absolute minimum and with the hassle.

Q92 Steve Baker: Mr Keller, you mentioned heavy levels of regulation. What are the specific opportunities for the Government to do less?

Dale Keller: The problem we have with the CAA is the cost-plus issue. The more regulation is deferred from the DFT across to the CAA, it is going to add a lot more cost. Ultimately it makes the UK less competitive. The overseas view is important because a lot of the traffic into the UK is not about UK business people or holidaymakers going overseas. We have to look at the inbound. Our reputation overseas is sliding dramatically as a result of being seen as less competitive and with more regulation. It concerns everything from visas to air passenger duty. It is about time we stopped the slide. We have to invest in the future and keep the UK on top in this business.

Q93 Steve Baker: Mr O’Leary, is there anywhere where you think the Government should do less?

Michael O’Leary: Yes. Down in Kingsway it’s called the CAA. We could shut it down tomorrow so far as they have any economic regulation whatsoever. They do a very good job on the safety side and we all accept there is a need for safety regulation, but economic regulation of the airline industry is insane. It has never worked. Since 1945 it has proven to be a complete disaster. What we have here is probably the archetypal evidence of that disaster. There is a complete muddle of airport policy here in the south-east. You have an airline infrastructure here among the British airlines that is being rapidly outpaced by airlines around the world. I think a lot of it falls back on this kind of muddled regulation. You get a lot of theoretical economists out of Oxford. You put them in Kingsway and they never see the light of day apart from coming out occasionally for a sandwich, but they have no grounding in reality and don’t know much about air transport at all.

The fastest-growing section of the market for the last 20 years has been the low-fare airline segment. The remarkable thing is the regulatory bias against the low-fare airlines. Passengers flock to us. They love us. They can’t get enough of us, and yet we have the regulators waffling along worrying about hub airports where, in actual fact, you deliver very little passengers. I couldn’t disagree more with my colleague Mr Keller’s analysis of hub airports. I think there is absolutely no reason why the regional airports can’t develop long-haul services. They are developing long-haul services. They work very well. It is just that the organisation of the high-fare carriers would like to shunt everybody into Heathrow where they can screw them for ever higher fares and even more delays.

Q94 Chair: The passengers certainly flock to you, Mr O’Leary. I am not so sure that they love you at the same time.

Michael O’Leary: Madam Chairman, 80 million passengers says you are wrong.

Q95 Steve Baker: I would just like to put a Hallelujah on the record because usually it falls to me to make such a trenchant free market criticism of Government policy. Are there any areas where you think the Government ought to do more?

Chair: Or is it that you want them to do less?

Michael O’Leary: I would like them to make a decision on airport runway capacity in the south-east. They could do that by about seven o’clock this evening and we could do away with two years of fudge and dither by the Davies Commission and all the lobbying and the scurrying around of the lobbyists. We could just then get on with growing the industry.

I would like them to scrap APD, which is a complete disaster and has caused visitor numbers to the UK to decline. It makes UK aviation fundamentally uncompetitive and has most of our other European countries laughing at UK aviation policy. Instead of getting the visitors into the country and taxing them when they are in here, you guys are standing there at the runways like latter-day highway robbers saying, "Welcome to Britain; it’s a stick-up, guv."

Chair: I don’t think it is us, Mr O’Leary. I must dissociate ourselves from that.

Q96 Steve Baker: You have called for three new runways. Do you think that private investors would pay for them?

Michael O’Leary: In a flash, as long as they are not subject to regulatory cost-plus nonsense.

Q97 Steve Baker: Given that and given our conversation, do you recognise that all elected politicians do face profound pressures, not just in terms of residents who would be affected by new runways but also in terms of quite real environmental pressures? Do you recognise those things?

Michael O’Leary: I do and I think it is one of the great challenges for elected politicians. Do you pander to the noisy militant few or do you actually make sensible long-term economic decisions in favour of the many? There is no doubt that, yes, there are some people who bought houses beside Heathrow airport, Gatwick and Stansted. They made a conscious decision to buy houses beside an airport, although, to be fair, the noise footprint has significantly declined in recent years. Aircraft are getting quieter. There are fewer night-time flights. Sometimes one of the downsides of being an elected politician is that you are called upon to make some sensible long-term economic decisions. You couldn’t get a more sensible long-term economic decision than three runways in the south-east and be done with it.

Q98 Mr Leech: Our previous witnesses all suggested that an APD holiday for new long-haul flights wouldn’t work. Do you agree or disagree?

Michael O’Leary: An APD holiday is a complete waste of time. You should scrap it. We did suggest to the Treasury again, as I have said, that, instead of having APD on flights, they should actually tax hotel nights, although the expert for the Treasury had discussed that with the hotels in London and the hotels in London thought it was a bad idea.

Q99 Mr Leech: Let’s assume for one second that APD is not going to get scrapped. I think that is probably the most likely scenario. If it is not going to get scrapped, would an APD holiday for new long-haul flights help establish long-haul flights?

Michael O’Leary: No.

Q100 Mr Leech: Does anyone else have a view?

Otto Grunow: Again, there is a risk that the distortionary effect of favouring some airports over others as an explicit Government policy and actively disfavouring the hub is going to have unpredictable effects. It is picking winners and losers ultimately. We serve Manchester both from New York and Chicago. To the extent that there are pinpoint services that one can take-especially where we have a hub on the other end in those two examples I have just mentioned-we can feed it from one side and we would seek to use the distribution and marketing power that we have with our alliance partners to try to gather more traffic on the UK side of a point-to-point route like Manchester.

Strategically, I don’t think that we would say it is a complete either/or and that one should focus everything on the hub to the exclusion of other regional services. They are more price-elastic. The low-cost carriers have done a very good job in stimulating market demand in a whole new sector of the population that never used to fly. To the extent that it lowers barriers, costs and removes taxes, yes, that helps, but it is a very dangerous thing to get into the micro-management of the aviation economy by selectively taxing here and there.

Q101 Chair: We have been told that potential visitors to the UK go to continental Europe instead because of air passenger duty. Is there any concrete evidence that that is true?

Dale Keller: We can just look at the situation where overseas airlines, when they are making their route planning decisions, look at the total competitiveness, including those costs. There is evidence to show that the continental airlines are picking up those routes. That is because of the cost and the capacity. The difference now is that some countries have actually frozen, reduced or abolished the APD. We have continued to increase ours to at least double inflation. We are past the tipping point where we are getting a decline.

Michael O’Leary: A real problem is particularly at off-peak and winter periods. If you look at it particularly for regional airports, we would sell a lot of seats during the winter period at £10, £12 and £15 one-way. APD accounts for the guts of 100% tax on that. It is much easier for us to take someone from Ireland to Spain, France or Italy where there is no tax at €13 or €14 than it is to bring them here to the UK. You have seen a huge collapse in Ireland/UK numbers in recent years. There is no doubt that APD, which is a hugely regressive tax and particularly affects the ability of the regional airports to grow, plays a key role in that.

Just to come back to Mr Leech’s question, if you are not going to abolish APD, a holiday would have very little effect. APD is not that much of a disincentive to the decision to launch a new long-haul route, but you should have some degree of proportionality. We would clearly favour a percentage tax. The high-fare carriers would go berserk because they don’t like paying a high percentage tax. For the low-fare airlines like easyJet, ourselves and others, in many cases during the winter period the tax on our passengers is more than 100% of the underlying air fare.

Q102 Chair: Mr Grunow, do you want to comment on the air passenger duty issue?

Otto Grunow: I would just add that, if you are not going to scrap the APD, then it is primarily a question of looking at the competitive landscape. One can look at the European countries with competing hubs that are in a direct dogfight against the UK economy. You can ask what their equivalent tax burdens are like and that can be a pretty good guide. We know that in places like Ireland it is €3, which is very low compared to the local levels. There is quite good guidance conceptually as to what the right level of APD should be if it can’t be eliminated. I will leave it there.

Michael O’Leary: In that respect it is interesting that Northern Ireland has been forced to reduce APD because of the drain of people across the border going south.

Chair: Thank you very much, gentlemen.

Examination of Witnesses

Witnesses: Mark Tanzer, Chief Executive, ABTA, Andrew Cooper, Director, Government and External Affairs, Thomas Cook Group, and Eddie Redfern, Head of Regulatory Affairs for Aviation, TUI Travel, gave evidence.

Q103 Chair: Good afternoon, gentlemen, and welcome to the Transport Select Committee. Could you give us your name and organisation?

Eddie Redfern: Good afternoon. I am Eddie Redfern, Head of Regulatory Affairs at TUI Travel.

Mark Tanzer: Good afternoon. I am Mark Tanzer, Chief Executive of ABTA.

Andrew Cooper: Good afternoon. I am Andrew Cooper, Director of Government Affairs for Thomas Cook.

Q104 Chair: Could you tell us how outbound travel contributes to the economy of the UK?

Mark Tanzer: It contributes hugely. We commissioned some economic research earlier this year to quantify the contribution of outbound. That was partly to scotch the long-running view that there was a tourism deficit and that it would be better if people stayed at home. The process of buying your outbound holiday contributes very significantly and the numbers that the economists came up with were a direct spend within the UK of £31 billion. Some of that is on air services but also purchases in advance of travel. The multiplier effect of that through the economy takes you to the area of £50 billion per annum, which is much bigger than UK citizens spend overseas.

We were particularly keen to do this because it sometimes distorts the political discussions we have over capacity and so forth with a view that it would be better if people didn’t travel overseas. We don’t believe that. ABTA’s members predominantly do outbound travel but we have a very big domestic footprint too. We just want to say that we see outbound domestic and inbound as all part of one tourism industry, sharing a lot of similar issues at the moment.

Q105 Chair: It has been suggested that leisure travel should be reduced so that business travel can increase. Is that a feasible suggestion? Would anyone like to comment?

Mark Tanzer: I certainly would not want to see leisure reduced to a second-class issue within the travel debate. The reality is that a lot of flights are made viable because you have a mix of leisure people visiting friends, family and relations, transfer passengers and business. It is not as though every flight can be clearly segregated as a leisure flight versus a business flight. You need all four of those to be operating to have an effective industry.

Q106 Chair: Could leisure traffic move from, say, Heathrow to Stansted? That has been one suggestion.

Eddie Redfern: The business model of Thomson Airways and TUI Travel in the UK is placing aircraft where the demand is. Therefore we have 15 aircraft based at Gatwick. Those aircraft operate high density seating with high load factors, so therefore it is a very efficient use of those slots at Gatwick. For the catchment area we manage to supply 15 aircraft. To suggest that a passenger living in Brighton would be prepared to travel to Stansted is quite risible because, certainly, Gatwick is the local airport for those passengers. We operate from 20 regional airports and each of those airports is a local airport from where the consumer wants to fly. If you move people from Gatwick, they have increased travel cost to another airport. They don’t want that increased cost. We are offering holidays and travel at a competitive price that the consumer is prepared to pay.

Q107 Chair: Are you saying that most people want to go to what they see as their local airport?

Eddie Redfern: Yes.

Andrew Cooper: That would very much be our view. The danger is that you almost end up with a degree of social engineering if you start saying to people living in a particular part of the country that they can’t travel from that part of the country. We would argue that regional flying is popular and has always been popular. People prefer to travel locally. You, like I do, live in the north-west of England. To have to travel to the south-east to travel is massively inconvenient. That is one of the reasons that both we, as charter airlines, have been successful and, if I look at the rise of the low-cost carriers, they have been successful because they are offering flights from local bases to where people want to travel from.

Q108 Chair: Is connectivity important to leisure travel or is that just something that matters to business travel?

Andrew Cooper: It is in the sense that it creates a variety of routes and destinations. The subject has always been China in this particular debate for some time. We may not have huge numbers of tourists wanting to travel to China, for example, but there are routes that tourists want to go on that overlap with business routes. The reality is that you have to have sufficient connectivity to encourage customers to travel.

If I look at our group as a whole, we have a business called Gold Medal Travel. It carries about 300,000 passengers a year, all on scheduled flights. That business works because customers can actually go on seats that are partly for business travellers and take their holidays to destinations, taking the example of the middle eastern hubs, using those aircraft that are partly filled with business travellers to go on holiday. As Mr Tanzer said, there is an overlap of route and customer on any given flight. Connectivity is as important for the leisure traveller as it is for the business traveller.

Q109 Chair: What are the patterns of demand for leisure travel? Is that demand equal in all parts of the UK? Can anybody give me a picture of the trend as to what is happening?

Eddie Redfern: It varies depending on the UK and depending on the time of year. For example, around some of the regions the summer factory closures differ so you have higher demand from Scotland in July than you do from somewhere like Newcastle. Our business model is very much based on the demand of the consumer.

Andrew Cooper: It is fair to say that there is a difference in wealth in different parts of the country. There is probably a higher propensity to take holidays in the south-eastern corner than there might be in some other parts of the country because you have people with a higher disposable income who might take second breaks in the year, whereas people from other parts of the country may only be able to afford to take one holiday a year. That does lead to variations in demand.

Q110 Chair: How important is that kind of business to your operation?

Andrew Cooper: It is critical. Those of us with charter airlines have fleets of aircraft that we have to keep flying year round, if possible. We have an issue at the moment that the demand between seasons is probably something like three to one as between summer and winter. There is three times more demand in summer, so we have to find other things to use our aircraft on in the winter. If we got squeezed further, we would find ourselves with just not having a viable fleet operation at all. It is fundamental that we encourage demand in the winter and we can keep the aircraft operating.

Q111 Iain Stewart: I have a question for Mr Tanzer. In your written evidence, you reject a virtual hub between Heathrow and Gatwick connected by a high speed line as not being viable, but, also in your written evidence, you argued that High Speed 2 should be redesigned to have a much more effective connection with Heathrow. That opens up the possibility of a Birmingham/Heathrow virtual hub. Why do you think that might be viable but a Heathrow/Gatwick one wouldn’t?

Mark Tanzer: Our view is just that the customer experience of a Heathwick link would be unsatisfactory and wouldn’t achieve the goal. It wouldn’t have added capacity and it wouldn’t have created the hub effect that was being looked for. We are very aware that access to whatever the airport configuration is is key. High Speed 2, as far as it could be part of a solution to that, is something that we would support and encourage, not at the expense of airport capacity expansion but as an adjunct to it.

Q112 Iain Stewart: If you get the remodelling of High Speed 2 as you propose, what options in your view does that open up for a virtual hub?

Andrew Cooper: I would make an observation there. High Speed 2 is necessary just because of the growth of population in the UK. It is providing additional transport links within the UK. I don’t think it should be seen as some way of providing an alternative hub mechanism. It should not be viewed as that. It has a stand-alone business case that says it exists to ensure that, as the population grows in the UK, they can travel around.

The concern that we would have with the concept of a virtual hub, if you take the Heathwick example, is that you are trying to move customers between one already full airport and another virtually full airport. You are not serving any great benefit in having that particular linkage there.

I would echo the comments made by the first panel that was before you today. The idea of somebody spending even, at best, 35 or 40 minutes on the train getting from Heathrow to Birmingham is going to add so much time and inconvenience on to their travel arrangements that I would be very surprised if anyone would actually want to use that particular link.

Q113 Kwasi Kwarteng: Obviously you have talked particularly about capacity in the south-east and there have been various solutions put forward. What are your general and specific thoughts relating to this issue? What would you want to see?

Eddie Redfern: From a TUI Travel perspective, we want to see airport capacity discussed in full across the UK because we don’t operate from a hub. A hub is very minor for us. For us it is about connectivity to those airports. We reported to this Committee that, as a result of the adverse weather, one of the problems we had was getting passengers and our colleagues to and from those airports. As part of an aviation strategy, we would want the Government to look at connectivity and surface access to those airports.

Q114 Kwasi Kwarteng: Do you have any specific views in relation to that particular point? Are there certain concrete things that you want to see?

Eddie Redfern: Yes; better rail connectivity to the regional airports because what that should do is drive better use of local transport.

Q115 Kwasi Kwarteng: With regard to the specific issue of runways, are you agnostic or don’t you feel that that is something we should particularly look at?

Eddie Redfern: We would support additional sustainable runway capacity at those airports that have demonstrated the need. Gatwick is getting to that point where it is about to demonstrate the need for additional capacity. Providing that is done sustainably, we would support that, but for the rest of the UK at the moment we don’t believe there is a capacity issue. There may be in 10 or 15 years’ time at some of the other regional airports but not at this time.

Andrew Cooper: One concern we have in this regard is that, if you leave things as they are, the growth in demand has to be met somehow. You will end up having to make decisions about moving customers in one shape or form. What we wouldn’t want to see, for example, is leisure being treated as somehow second class and our customers being pushed, if they have to come from Brighton and want to go on holiday, to travel to Stansted in order to go on holiday. That seems to be a level of influence on decision making that shouldn’t be there. The concern we have at the moment is, because the south-eastern airports are so nearly full, unless there is some other solution found, that is where the ultimate answer has to be.

Q116 Kwasi Kwarteng: Mr Redfern expressed a view about Gatwick. He thought that was where there should be an extra runway. Do you have a similar concern?

Andrew Cooper: We have a similar concern. If we look at Gatwick, as one of the previous witnesses said, it is remarkable that it is the busiest single-runway airport in the world. It is quite clear that the catchment area for Gatwick is the whole of the south-eastern corner of Britain. In practice, our view is that there is a need for extra capacity there.

Eddie Redfern: It should be borne in mind that over 70% of Gatwick passengers are leisure travellers. They are not all business travellers. A suggestion of Heathwick to us presupposes that somehow those leisure passengers will go elsewhere. Certainly previous attempts by Government at traffic distribution have failed either through legal challenge or, when those traffic distribution rules were removed, the market forces meant that airlines decamped to Gatwick and then eventually to Heathrow. The example I cite is People Express. Once the traffic distribution to Stansted was redefined in the late 1970s and early 1980s People Express moved to Gatwick. Then, once Heathrow was opened up with the EU/US agreement, carriers moved from Gatwick to Heathrow, so it is market forces.

Q117 Kwasi Kwarteng: Mr Tanzer, do you have a view on this?

Mark Tanzer: I share the views of my two members either side of me of course. What we are looking at is how quickly we can get this capacity. We don’t want to just build it if it then fills up immediately. If it is to be Heathrow, we have to demonstrate that that really is going to increase capacity, it won’t just take planes out of the stack and they will be immediately full again, and it is future-proofed. Through the Davies Commission, we need to get a sense of how quickly we can move through the planning, building and financing.

Q118 Kwasi Kwarteng: What do you think of Michael O’Leary’s suggestion that we should have three extra runways-one each at Stansted, Gatwick and Heathrow?

Mark Tanzer: Personally I would endorse that. He is right that excess capacity enables a more free market in terms of supply and demand. It also improves resilience and the customer experience. If you could have that and really let the market decide where the passengers and flights went into rather than the politicians, if I can put it like that, I think it would be a more satisfactory solution.

Andrew Cooper: As one of you commented earlier, there is a massive challenge here in the sense that you are trying to balance the needs of local communities versus the environment versus aviation capacity. Clearly we are here to put the case for aviation capacity. We would say that, if aviation is able to demonstrate that it can grow sustainably, then it seems strange that it should be prevented from doing so. It has always been one of my concerns, until recent developments in thinking within the Department for Transport, that there seems to be a localism versus international aviation. There seems to be a slightly odd challenge that, if local interests say you shouldn’t expand aviation, then it is not going to happen, whereas aviation is an international industry. I am not quite sure that it is one versus the other. I think somehow that balance has to be drawn but it has to be drawn in a more coherent fashion.

Q119 Chair: You might think it strange but it is a reality. It is a challenge that we all have to address.

Andrew Cooper: I do understand that, yes.

Q120 Mr Leech: Both our previous sets of witnesses oppose the idea of APD holidays for new long-haul routes. Given that your business model is somewhat different from theirs, how would your industry react to that idea?

Andrew Cooper: It is quite interesting. I was reflecting while they were giving their comments. I was trying to think of comparative behaviours elsewhere in businesses we work. I came up with what I would say is probably a relevant comparison. The Spanish over the last couple of years have been encouraging growth in certain airports, in the Canary Islands in particular, by saying that they would reduce landing fees to encourage the growth of new routes. In the recent elections the first thing the Government did after those elections was to reverse that policy. Their concern was-and we as the incumbent carriers felt this quite strongly-that we were operating those routes and were suddenly finding a competitor coming in on a similar route to us who had a lower cost base because they didn’t have to pay the landing fees.

The same logic can be applied to introducing the long-haul routes. If it is attracting purely new business traffic, then, yes, potentially there is a win. If all you are doing is moving one customer from route X to route Y because they have an APD holiday on that route, then you are not actually achieving anything. All you are doing is interfering with the market overall.

Q121 Mr Leech: Is it not generally the case that when you fly people from Gatwick for their holidays it is cheaper than it is from the other airports?

Andrew Cooper: Most of us in costing prices will start with a base airport. We generally do it on the south-eastern airports because it happens to work more conveniently because most of our routes head towards the south-east and the Mediterranean. The cost of that is determined more by the cost of fuel than anything else. It is not determined by the cost of operating the airport.

Q122 Chair: Does the cost of air passenger duty encourage people to fly to the continent rather than from the UK? Do you have actual evidence of that happening?

Eddie Redfern: We have seen evidence from Northern Ireland, because we operate holidays from Northern Ireland and from the Republic of Ireland, of a shift of passengers who live in Northern Ireland travelling out of Dublin to avoid paying the APD.

Q123 Chair: Does that happen from regions of the UK outside the south-east as well?

Eddie Redfern: We only operate point-to-point from the UK, so we would not see passengers transferring to the continent.

Q124 Chair: Does anybody else have any information on that?

Andrew Cooper: As a travel agent we do see some behaviours that are about tax saving, but I would say it is more about overall cost saving. I will use Manchester as an example again. If it is cheaper to fly from Manchester to the far east by hubbing over Schiphol, people will do that. Whether it is the tax that drives that or the actual cost of travel, the decision is quite often made on cost.

Q125 Kwasi Kwarteng: With regard to APD, do you think there will come a point, or have we already reached the point, where APD is seriously damaging your business?

Andrew Cooper: Yes.

Eddie Redfern: There is an effect on our sales because of APD. The economists in the Treasury say to us that it is straight cost passed through. The reality is that selling holidays as we do is very cost-sensitive and we have to discount holidays. Certainly, on long haul, we have to discount probably at least to the level of air passenger duty.

Andrew Cooper: I would add two comments. If I look at our long-haul fleet, we have reduced it by about 40% over the last five years. It was relatively small to start with. That has been driven by the fact that it is difficult to sell long haul because of the additional cost. Our main programme is to the Caribbean.

Secondly, the effect on premium economy seats in particular, where you end up paying double the rate of APD for what is no more than three inches of extra leg room, is that we have seen a very significant decline in demand for that product even though customers actually wanted to buy it. The fact that they had to pay double APD in order to get those seats definitely had an impact on our sales. We no longer sell that ex-UK. If I go to Jamaica, I can buy an extra leg room seat inbound, but we won’t sell it on the outbound to avoid having to pay that extra air passenger duty.

Q126 Kwasi Kwarteng: What was the process before that? APD has been around for nearly 20 years now. I think it was introduced in 1994 or 1995. At what point did it become so damaging, as you have described? Clearly you would want to see it abolished; I understand that. But was there a point in that period?

Andrew Cooper: It was the banding in particular. It doubled on three months’ notice in 2007. That started the downside. The decision to move from a two-tier system to the four bands definitely had an impact and led to these big anomalies. As it is based on capital cities, the fact that the Caribbean was significantly more expensive than America, for example, did have a very real impact.

Q127 Kwasi Kwarteng: So that was the critical time. If you were looking at it in terms of historical analysis, that did coincide with the financial crisis.

Andrew Cooper: It did; yes.

Q128 Kwasi Kwarteng: The falling-off of demand probably can’t exclusively be attributed to it.

Andrew Cooper: I think that is right. The problem with all of these things is that you end up with a whole series of factors coming into play at the same time. We would say that from our perspective APD was certainly a factor.

Q129 Chair: Mr Redfern, earlier you referred to problems with surface access to airports.

Eddie Redfern: Yes.

Q130 Chair: Can you give us any examples, or could anyone else?

Eddie Redfern: If you go back to the inclement weather at the end of 2010 and early 2011, certainly one of the big factors there was that we couldn’t get passengers or our crews to and from the airports. That was because of the poor surface access. That was mainly because the roads had not been cleared of snow and so on, but it did highlight how poor the access to our airports is because most of our airports are not connected by a direct railway service.

Q131 Chair: Is that a general point you are making and not just about one airport?

Eddie Redfern: Yes.

Andrew Cooper: I think that is a very important point. Again, I will look at the example of the comparison between Liverpool and Manchester. Liverpool is not an easy airport to get to, in the sense that it is quite a distance off the motorway network and is also quite a distance off the public transport network. You have local buses that will take you into the city centre, but, if you compare that to Manchester, where there is a good rail network and trams are being extended to the airport, you have a big difference in terms of ability to get to and from the airport. I think that, historically, that is why Manchester has benefited. Liverpool is now competing more on price, which is dragging more traffic into it, but to have those good transport links has been a big win for Manchester.

Q132 Chair: Do you all see that as an issue generally?

Andrew Cooper: Yes. Even if you improve the connectivity, you still have an issue in terms of quality of service. It is all very well putting on a train link, but then, if you are a family of four with young children, to carry those children and your luggage to an airport can be challenging.

Chair: Thank you very much, gentlemen, for coming.

Prepared 31st May 2013