Aviation

Kwasi Kwateng MP

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 Executive Summary

• London’s economic advantage as crossroads for the world is being put under threat by the shortage of aviation capacity. 

• While demand is set to double in the coming decades, Britain’s hub airport Heathrow is already at 99% capacity.

• London is still arguably the best connected business city in the world. However, this advantage is already starting to slip, especially in regards to emerging markets. Heathrow’s route network has dropped from 227 destinations in 1990 to 180 today, and is forecast to fall further to 147. Paris and Frankfurt enjoy 1000 more annual flights to the three largest cities in China than Heathrow.

• Ideally, the Government should not seek to plan the future course of the aviation industry itself. However, it should enable the industry’s future expansion by reforming the planning system.

• The publication of the Aviation Strategy this summer is a crucial moment for the future of the industry and the wider British economy. Britain needs at least one new runway in the South East by 2020.

1 The Global Challenge

If Britain prospers as a world hub in twenty first century, it will not be because of a Government strategy. However while Governments may not be able to guarantee future prosperity, they can certainly undermine it.  Industrial strategy in the twenty first century must be about finding where the state is holding the economy back, and making sure it gets out of the way. It must enable rather than block.

The aviation sector is the perfect example of an industry that needs Government help. Its future expansion is currently being restricted by overly cumbersome environmental and planning regulation. While we don’t need the state to try and plan the future course of the industry, we do need it remove the restraints on its sustainable growth.

Aviation is a key strategic industry for Britain’s future. By the end of the twentieth century, the trend of the future economy had become clear. The process of globalisation continues to accelerate, as trade expands between nations and supply chains fragment across the world. The archetypal product of today, the iPhone, was conceived in California, runs on a chip designed in Cambridge, uses components from South Korea, Japan and Germany, and is finally constructed in China.

Economic activity is increasingly concentrated in dense clusters. While manufacturing industries congregate together to shorten supply chains, the real benefits in today’s economy comes from bringing people closer together. Over half the world’s population now lives in cities, and an extra five million join them every month.[1]  In the mid twentieth century, urban metropolises like New York and London were visibly in decline. Now they thrive again. As nations like Brazil and China finally start to catch up with the West, new names are being added to the roll call of leading cities. Jakarta and Chongqing are as important as Paris and Geneva. In 1950, just three cities contained more than ten million people. By 2025, there will be twenty seven.[2]

This international web of cities is linked together by cheap freight, fast transportation and digital communication. Many have predicted that the convenience of the Internet would diminish the need for travelling in person. The opposite appears likelier to be true.[3] The easier it is to communicate, the more dispersed one’s relationships can be – but at some point, everyone wants to meet in person. The new global elite spend much of their life on a plane; they do not want to attend Davos by video conference.

At the heart of this web is London. For reasons of history and geography, London has enjoyed a position as the crossroads of the world. It enjoys the right language, a convenient timezone and world leading financial and cultural centres. Britain has always made its way as a trading nation and London as a port. Once it sold its wares by sea. Today, London’s businessmen travel by air. In one survey for London First 90% of respondents argued that growing the number of international air links was crucial to the long term health of London and their business.[4] 40% of the UK’s exports, measured by value, go by air.[5]

Unfortunately, London is now critically short of aviation capacity. This threatens both its position as a world hub, and its connections with new emerging markets.

2. The UK Response

London is still arguably the best connected business city in the world. London’s five airports between them offer access to around 350 international destinations.[6] However, this advantage is starting to slip. The Civil Aviation Authority (CAA), the sector’s politically impartial regulator has warned, “While London is well connected now, capacity constraints at London’s airports may already mean less able than airports in other European cities to adjust as global economic activity shifts to emerging markets such as China, India and South America.”[7] The CAA worries that lack of capacity will deter airlines from taking a chance on new routes, and that the UK will find it hard to develop new Air Service Agreements with foreign states.

In the last twenty years, Heathrow has fallen from 1^st in Europe to 5^th in terms of destinations served. [8] Heathrow’s route network has already dropped from 227 destinations in 1990 to 180 now, and is forecast to drop to 147.[9] Paris and Frankfurt offer 1000 more annual flights to the three largest cities in China than Heathrow. Heathrow misses out on at least 21 Emerging Market destinations that are served by daily flights in its European rivals.[10] A survey of 350 company directors from Brazil, India, China, Mexico and South Korea found 67% were more likely to do business in France, Germany or Holland because of their better air connections. 62% said that they would only in Britain if flight connections improved.[11]

The UK is already missing out on the new tourism boom from the emerging Chinese middle class. Earnings from tourism grew by 85.6% in Germany from 2000 to 2010 compared to only 37.4% in the UK.[12]

One report from Frontier Economics suggests that businesses trade 20 times as much with Emerging Market countries that enjoy a direct daily flight. They suggest that lack of access to new markets could already cost the economy £1.2 bn, and this problem will only grow. Another report by Oxford Economics suggests that a constrained Heathrow could cost the economy £8.5 billion a year and 141,400 jobs by 2021.[13] Near half of the increase in the UK’s trade in the last ten years has come from Emerging Markets. The IMF predicts that in the next ten the eight largest developing markets will produce over half of worldwide growth.[14]

Margins in the aviation industry are not high. In 2003, The Economist magazine complained that in sixty years of operation the airlines had never succeeded in earning a return on their capital.[15] Viability depends on the economics of scale gained from maintaining a large network, and taking advantage of economies of scale and valuable transfer passengers that only a hub airport can bring. A service operating out of Heathrow 15-20% more valuable per passenger to an airline that one from Gatwick or Stansted.[16]  Up to three quarters of the long haul routes operating from Heathrow might not be viable if they lost their transfer passengers.[17]

Unfortunately, those transfer passengers and the wider short haul network they depend on are now at risk. As space runs out, short haul routes have increasingly been forced out of Heathrow in favour of more immediately valuable long distance routes. Heathrow’s position as world aviation hub is threatening to unravel.

In a speech in February 2011, Giovanni Bisignani, Director General of the International Air Transport Association went so far as to say, “The UK has a great tradition of leadership in aviation. But any industry can only take so many knocks before the damage is permanent... Aviation provides critical global connectivity to this island nation... With the decision to abandon plans for a third runway, London Heathrow is becoming a secondary hub.”[18]

Heathrow’s two runways now run at nearly 99% capacity.[19] During peak periods, aeroplanes are forced to circle in the air for up to 45 minutes.[20] Gatwick operates at 95% capacity, the busiest single runway airport in the world. The lack of spare capacity makes the airports extremely fragile, with no room for error.  

By contrast, other European hubs generally operate at 75% capacity, allowing them to recover from early mistakes. While Heathrow has been forbidden a third runway, Frankfurt has just opened its fourth to match Paris Charles de Gaulle, and Amsterdam Schiphol has six. Further afield, the world’s biggest airport, Atlanta, already has five runways. The second and third, Chicago O’Hara and Dallas Forth Worth, have seven each. In 2015, China plans to open a new nine runway airport, Beijing Daxing International, serving 370,000 passengers a day.[21]

Compare the situation of London to one of its rivals, Dubai. In recent decades, Dubai has sought to transition from short term oil wealth to long term prosperity by turning itself a central hub for the Middle East and Africa. Dubai sees itself as the centre of a new Silk Road, connecting together Asia and Europe. 3.5 billion people, or more than half the world’s population, live within the reach of an eight hour flight. Air traffic has tripled in the last decade.[22] Recognising that its current two runway airport is running out of space, Dubai is investing in the construction of a new facility. The Al Maktoum International airport will be ten times as big again as the current Dubai International Airport and Dubai Cargo village combined. Its five runways will allow up to four aircraft to land simultaneously, twenty four hours a day.

If Britain is to compete with the likes of Dubai in the future, it will need more aviation capacity in the South East of England. Aviation demand is expected to roughly double in the next few decades. Short term alternatives, like more flying at night or combining Heathrow and Gatwick through a high speed line into ‘Heathwick’, will not solve the fundamental problem.

One possibility is the creation of an entirely new hub airport, perhaps located in the Thames Estuary as suggested by London Mayor Boris Johnson. Such an airport could be located where it has room to expand and add as many runways as needed. It wouldn’t require demolishing of historic churches or villages. It could operate twenty four hours a day, making the facility far more suitable for freight. By situating the airport away from significant populations, we can ensure that noise and air pollution are no longer a problem for the locals.

The most important objection to the project is the time it would take to build. Current estimates it would take at least thirty years to build, while Britain will need new capacity long before 2040. Perhaps these estimates are overly pessimistic. In the 1990s Hong Kong moved its hub airport from Kai Tak to a reclaimed island in just eight years, under greater engineering challenges than would face a Thames airport. That project involved not just building the airport itself, new roads and high speed railways, but bridges able to withstand typhoons over two hundred miles per hour, and five miles of tunnels.[23]

However, it would certainly be simpler to expand the current London airports. A third runway at Heathrow could be in operation in as little as a decade after the decision was made to go ahead. The aviation industry has already offered to fund the £9 bn cost. The British Chamber of Commerce estimates that this runway only could produce £20 bn of wider economic benefits.[24] Creating new runways at Heathow, Gatwick and Stansted could meet probably meet aviation demand for the next few decades.

Expanding the current airports, of course, causes more problems for local residents. One possibility, however, would at least avoid the demolition of hundreds of homes in villages such as Sipson. A third runway for Heathrow could be created by augmenting the already existing runway at RAF Northolt. This runway is already 1687m long compared to the planned 2200m of the third runway, and Northolt is only around 10km north of Heathrow. [25] Other airports such as Amsterdam Schiphol already feature new runways several miles from the control tower.

3. Planning and Compensation

Just as the Government shouldn’t try and plan the future of the economy as a whole, it would be preferable not to seek to plan the aviation industry. Government has a poor track both at judging the future demands of consumers, and at estimating the costs of large infrastructure projects. Opinions can differ on where new capacity should be located. No choice is perfect. Good cases have been made both and for against adding runways at Heathrow, Northolt, Gatwick, Stansted, Luton and the Thames Estuary.

Instead, the Government should seek to enable the industry to make its own plans for future expansion. Economic decisions should be made by the price mechanism and free competition rather than special interests and political grandstanding. At the same time, the industry shouldn’t be offered any special favours. It is only right that airlines pay for the cost of their pollution through mechanisms such as the EU Emissions Trading Scheme, or other environmental taxes. Once those costs have been covered, however – as Department for Transport estimates suggest is already largely the case [26] - the industry should be free to expand in line with market demand. 

After political problems at the national level, the largest roadblock currently facing the industry is protests at the local level. A large part of the problem is Britain’s cumbersome system for planning approval. As long as the industry can cover its costs, there should be a presumption in favour of development.

The industry should directly negotiate adequate compensation with affected locals, rather than lobby through politics and the press, and then imposing a top down settlement. This does not, by the way, necessarily imply more development everywhere. In the case of Heathrow, for example, adequate compensation for residents could prove so expensive that relocating to Stansted or the Estuary becomes more attractive.

Although such a system would be ideal, what is most urgent is that broad approval is given for a new runway in the South East soon.

4. The Current State of the Aviation Debate

Thankfully, the wider debate is starting to move on. This summer the Government is set to publish its Aviation Strategy, which will look at how to maintain Britain’s hub status.

In a speech at the Institute for Civil Engineering in March 2012, Prime Minister David Cameron said, “ I’m not blind to the need to increase airport capacity, particularly in the Southeast... we need to retain our status as a key global hub for air travel; not just a feeder route to big airports elsewhere in Frankfurt, Amsterdam of Dubai.  Now yes, this will be controversial and we will need to take decisions for the long term; and we’ll be bringing forward options in our Aviation Strategy which will include an examination of the pros and cons of a new airport in the Thames estuary.”[27]

In his speech presenting the 2012 budget, Chancellor of the Exchequer George Osborne agreed, “This country must confront the lack of airport capacity in the South East of England – we cannot cut ourselves off from the fastest growing cities in the world.”[28]

In short, the 2012 Aviation Strategy is a crucial moment both for the industry itself, and for the wider economy. The current situation is proving increasingly unsustainable. In a world where China has built 33 airports since 2006, and plans another 45 by 2015[29], Britain hasn’t built a major runway in the southeast for 70 years.[30]

Britain’s best hope for economic success in the twenty first century is as a world hub. Restrictive regulation and the protracted length of planning decisions is putting that strategy at risk. If London is not to lose its position as a world city, we must act soon.

Bibliography

Boyfield Keith (Edited by) A Market in Airport Slots [Book]. - London : Institute of Economic Affairs, 2003.

British Chambers of Commerce The Economic Impact of Hub Airports [Report]. - London : [s.n.], 2009.

Civil Aviation Authority Aviation Policy for the Consumer [Report]. - 2012.

Department for Transport Aviation emissions cost assessment 2008 [Report]. - 2008.

Frontier Economics Connecting for growth:the role of Britain’s hub airport in economic recovery [Report]. - 2011.

Gaspar Jess and Glaesar Edward L. Information Technology and the Future of Cities [Report]. - 2006.

Glaesar Edward Triumph of the City [Book]. - [s.l.] : Penguin, 2011.

Greater London Authority A new airport for London [Report]. - 2011.

Kasarda John D and Lindsay Greg Aerotropolis: The Way We'll Live Next [Book]. - 2011.

Maynard Paul UK Aviation Industry on the Precipice [Report]. - 2011.

Oxford Economics The value of aviation connectivity to the UK [Report]. - 2012.