Airports policy: backing the wrong horse

The Department of Transport received a rude awakening last year when in August the Competition Commission released its Emerging Thinking report as part of its market reference inquiry into BAA. This inquiry, due to be completed in the next few weeks, has, as its focus, whether the ownership by BAA of two airport clusters, one around London and the other in central Scotland, has an adverse effect on competition. The Commission’s initial conclusion, since reinforced in its preliminary report, was that there was such an effect and that the economy would be better served by a more competitive structure requiring BAA to divest itself of 3 of its 7 airports. But, another, less expected, conclusion was that the Department itself had muddied the waters of competition.

It had done so by trying to pick winners in its 2003 White Paper, The Future of Air Transport. The purpose of the White Paper was to provide a policy framework for planning airport expansion projects and to guide decisions on future planning applications. It still remains the point of reference for UK airport policy. But what the government failed to come to terms with at the time was that the airport industry is for the most part privately owned and operated, competitive, successful and driven by commercial imperatives.

We now know from “restricted” papers, released in response to Freedom of Information Act requests, that work leading up to the White Paper planned privately-owned airports in astonishing detail and sought to second guess commercial decisions. For each major UK airport, bureaucrats considered design issues even down to the best way to provide additional stands for parking aircraft. Understandably, the Competition Commission found it difficult to reconcile government policy that supported specific developments and, in some cases, a preference for their timing, with the responsibilities of the commercial airport operators. It also noted that there must be a risk that the Department’s proclivities “…may not reflect market developments and customer requirements” (236).

The biggest winner from the 2003 White Paper’s endorsement process was Stansted Airport in Essex, which for decades has been favoured by governments. Chosen as a site for London’s “third” airport in 1985, with the Department’s encouragement Stansted was expanded too rapidly and wasted capacity was filled only by the advent of the low-cost airline business model. Airlines like Ryanair and easyJet were encouraged by very low charges, effectively underwritten by Heathrow, to use Stansted. But once the airport regulator, the CAA, had in the same year as the publication of the White Paper pulled the plug on BAA’s ability to cross-subsidise, the difficulties of producing an adequate return on Stansted’s capital emerged. The Department, seemingly blind to commerce, was not to be deterred. The White Paper’s most significant announcement was that the government supported the development of a second runway at Stansted: it added: “[w]e expect it could be completed by around 2011 or 2012″. 

The White Paper’s treatment of London Luton Airport, Stansted’s nearest competitor, stands in marked contrast to that of Stansted and provides an example of what the Competition Commission may have had in mind when it referred to the White Paper’s distorting effect on competition. The Paper was at best lukewarm about Luton’s prospects; the airport operator had included in its consultation response to the White Paper a proposal for a second runway but the White Paper categorically stated that it did not support this proposal. The reason for this lack of support was that, in contrast to its upbeat view of Stansted’s prospects, it doubted that prospective market growth would be strong enough at Luton to support such investment in the near future adding, parenthetically, that extensive transport infrastructure investment might be needed. How times have changed.

The last two years have seen a major slump in Stansted’s air traffic; passenger numbers have now fallen for 15 consecutive months and January figures are down by nearly a fifth on what they were in the same month two years ago. A decline is, of course, to be expected in the current economic circumstances but the reversal of passenger numbers at Stansted started well before the UK economy went into recession. Meanwhile, at Luton passenger numbers have boomed; so much so that during the first 11 months of last year (the period for which final figures are currently available) Luton saw the largest absolute increase in passenger numbers of any UK airport. In fact, if we project forward recent trends, Luton would have more passengers than would Stansted by the time of the expected opening date for the latter’s second runway (now pushed back to 2017).

Luton Airport’s excellent performance may reflect in part its equally excellent road and rail connections. It is linked to the newly widened M1 motorway, it has direct rail connections from Luton Airport Parkway station to St Pancras (with the fastest trains taking only 20 minutes, half the time taken to reach Stansted from its London terminus) and it has direct services (using Thameslink) to Surrey and Sussex. Later this year connections to Kent will be transformed with the start of high-speed domestic rail services that will make use of the Channel Tunnel rail link to access St Pancras.

Perhaps the time has now come for the government to align its airport policy with both market forces and the specific employment needs of Luton’s economy, partly dependent still on a motor industry facing structural decline (IBC Vehicles the van maker is a major employer). The government could do this by stating that it would also support market-led expansion at Luton Airport including, if the operator considered it necessary, a runway realignment to increase capacity or even a second runway, and that it stands ready and willing to facilitate the removal of what is probably the major impediment to further investment, the short outstanding term left on the operator’s lease. Doing these things would then place Luton on an equal footing with Stansted and would probably go far to ease concerns that the government, by favouring certain airports, is undermining a competitive market.

David Starkie is the author of Aviation Markets: Studies in Competition and Regulatory Reform.

This is the other Philip Booth again – not the IEA one or the ID card one – expansion of airports is indefensible. I am deeply concerned that you write about market forces and Luton’s economy with no mention of the environment – indeed in the whole article there is no mention of climate change? It seems extraordinary to many of us that our Government has given the green light for the greatest expansion of aviation in a generation. This is either the most shameless hypocrisy, or the most unforgivable ignorance and stupidity.BAA and the Government try to make reassuring noises about the environment but who is really fooled? They plan massive increases in CO2 emissions when we need cuts, the destruction of local communities and increased road traffic, air pollution and noise. Breaches in air quality standards are predicted along with increases in serious health problems.BAA say that expansion is crucial to the economy, but the contribution that aviation makes is frequently overstated. Eighteen million passengers merely use it to transfer to another international flight. That figure is planned to double by 2030. Furthermore the aviation industry is subsidised to the tune of £10bn in the UK alone. This includes various tax breaks, no pay for the damages of the noise and pollution it causes, no tax on aviation fuel and it is zero-rated for VAT.Passenger numbers are falling as you note and longer term oil prices are forecast to rocket. Yet again in Government forecasts are predicted on out-of-date oil forecasts. Supporting airport’s to expand whether at Heathrow, Stanstead or Luton, makes no sense economically or environmentally. Our competitiveness will come from creating a sustainable economy in the future, not relying on subsidised dirty, dinosaur-like industries.

Philip – Even if one accepts that intervention on climate change is justified then one can make a strong economic case that emissions should be reduced at the lowest possible cost. Thus it is conceivable that overall UK emissions could be reduced while emissions from aviation increased, if it was more efficient, for example, to achieve reductions in the energy sector. It is also important to remember that aviation is already burdened with air passenger duty, which raises £2 billion a year. Moreover, artificial constraints on airport expansion arguably comprise a hidden ‘environmental levy’, hampering competition and raising costs for air travellers. There are also plans to include aviation in the EU Emissions Trading Scheme from 2012, an additional burden.Having said this, there is probably a good case for harmonising the taxation and subsidy of competing modes of transport. This would mean, for example, adding VAT to all public transport fares, eliminating discriminatory forms of taxation (e.g. fuel duty) and ending subsidies (including the £6 billion per year to the railways).

This is the other Philip Booth again – not the IEA one or the ID card one – expansion of airports is indefensible. I am deeply concerned that you write about market forces and Luton’s economy with no mention of the environment – indeed in the whole article there is no mention of climate change? It seems extraordinary to many of us that our Government has given the green light for the greatest expansion of aviation in a generation. This is either the most shameless hypocrisy, or the most unforgivable ignorance and stupidity.BAA and the Government try to make reassuring noises about the environment but who is really fooled? They plan massive increases in CO2 emissions when we need cuts, the destruction of local communities and increased road traffic, air pollution and noise. Breaches in air quality standards are predicted along with increases in serious health problems.BAA say that expansion is crucial to the economy, but the contribution that aviation makes is frequently overstated. Eighteen million passengers merely use it to transfer to another international flight. That figure is planned to double by 2030. Furthermore the aviation industry is subsidised to the tune of £10bn in the UK alone. This includes various tax breaks, no pay for the damages of the noise and pollution it causes, no tax on aviation fuel and it is zero-rated for VAT.Passenger numbers are falling as you note and longer term oil prices are forecast to rocket. Yet again in Government forecasts are predicted on out-of-date oil forecasts. Supporting airport’s to expand whether at Heathrow, Stanstead or Luton, makes no sense economically or environmentally. Our competitiveness will come from creating a sustainable economy in the future, not relying on subsidised dirty, dinosaur-like industries.

Philip – Even if one accepts that intervention on climate change is justified then one can make a strong economic case that emissions should be reduced at the lowest possible cost. Thus it is conceivable that overall UK emissions could be reduced while emissions from aviation increased, if it was more efficient, for example, to achieve reductions in the energy sector. It is also important to remember that aviation is already burdened with air passenger duty, which raises £2 billion a year. Moreover, artificial constraints on airport expansion arguably comprise a hidden ‘environmental levy’, hampering competition and raising costs for air travellers. There are also plans to include aviation in the EU Emissions Trading Scheme from 2012, an additional burden.Having said this, there is probably a good case for harmonising the taxation and subsidy of competing modes of transport. This would mean, for example, adding VAT to all public transport fares, eliminating discriminatory forms of taxation (e.g. fuel duty) and ending subsidies (including the £6 billion per year to the railways).

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