Commission publishes new report on “strategic fit” for its consultation – on possible impact of runways on air travel cost
The Airports Commission has published another report to form the background information for its consultation. The consultation is on details of runway plans at two runway options at Heathrow, and one at Gatwick, and ends on 3rd February. The new document is entitled “Impacts of Expanding Airport Capacity on Competition and Connectivity – The case of Gatwick and Heathrow” and is by the International Transport Forum. It comes under the “strategic fit” category, and supports the strategic fit analysis in the consultation. By strategic fit the Commission means:”To provide additional capacity and connectivity in line with the assessment of need” and “To improve the experience of passengers and other users of aviation.” (Nothing to do with those affected by aviation impacts, but not passengers). The new document looks at possible scenarios of what might happen with either a Heathrow or Gatwick runway, and how airlines might react. While it is probable that both airports would have to put up landing charges, to pay for a runway etc, it is likely the extra runway capacity would reduce the cost of slots and therefore lead to lower fares. The extent this might happen is conjecture, as it is not possible to accurately predict airline etc behaviour in future.
Airports Commission website
The Commission says:
“These reports support the strategic fit analysis in the consultation on the Airports Commission’s short-listed options for additional airport capacity.
The Airports Commission’s ‘Forecasts’ report sets out the methodology, assumptions and results of the commission’s forecasting of aviation demand. It includes a description of the various scenarios modelled and the differences between them.
The ‘Expanding airport capacity: competition and connectivity’ report was produced by consultants (ITF/SEO). It assesses how airlines could respond across a range of different global scenarios to expanding runway capacity at either Gatwick or Heathrow. It considers the potential connectivity and competition impacts would be generated by such responses.
The Airports Commission’s ‘Fit with wider spatial and socio-economic development strategies’ report looks at the context of each expansion option across plans including:
- local authority and local enterprise partnership strategies
- national frameworks
- the London Plan
“Impacts of Expanding Airport Capacity on Competition and Connectivity – The case of Gatwick and Heathrow”
Just the Executive Summary is copied below:
[The term “passenger welfare” or “air freight user welfare” are understood to mean the access to routes and services, and the cost of these services. AirportWatch note].
The UK Airports Commission has short-listed three options for expanding airport capacity in the UK. One option concerns expansion of Gatwick with an additional runway. The other options concern expansion of runway capacity at Heathrow. The impacts of expansion on passenger and air freight user welfare do not only depend on the macro-economic and aviation industry future, as defined by the aviation scenarios already developed by the Airports Commission, but also on the airline responses that can be expected as capacity comes on stream. This report assesses quantitatively the competition, scarcity and connectivity impacts of different airline responses to expanding runway capacity at Gatwick
Airlines may react in different ways to expansion of capacity at Gatwick or Heathrow. The way macro-economic conditions change, how business models develop over time and how new aircraft (such as the Boeing 787 and Airbus A350) have an impact on the industry will affect the likelihood of potential airline responses unfolding. An additional runway at Gatwick would most likely see airlines responding either with development of Gatwick into a low-cost gateway or by expanding conventional point-to-point services at Gatwick.
Additional runway capacity at Heathrow could be expected to be taken up predominantly by hub operations but in some circumstances could see growth focused on an increase in point-to-point services at the airport.
These two pairs of airline responses can be considered as representative of the range of outcomes for capacity expansion at Gatwick or Heathrow. The four responses combined with the most relevant aviation demand scenarios developed by the Airports Commission are assessed in this report for the impact on socio-economic welfare.
The four airline response-scenario combinations (‘airline response outcomes’ for short) are as follows.
Airline response outcome 1: ‘Hub-carrier growth at Heathrow, point-to-point growth at
Gatwick’ combined with the Airports Commission ‘Assessment of Need’ scenario.
Airline response outcome 2: ‘Point-to-point growth at Heathrow and Gatwick, Heathrow
remains the network hub’ combined with the Airports Commission scenario ‘Low-cost is
Airline response outcome 3: ‘Partnerships: Gatwick becomes a low-cost gateway, Heathrow remains the network hub’ combined with the Airports Commission scenario ‘Low-cost is King’.
Airline response outcome 4: ‘Gatwick point-to-point growth, Heathrow remains the network hub’ combined with the Airports Commission scenario ‘Relative Decline of Europe’.
We estimate the airline response outcomes in terms of connectivity gains, competition gains and gains due to a reduction in scarcity rents to the benefit of passengers, all in comparison to a ‘do minimum’ scenario without any expansion of capacity in the London airports system.
The analysis of the airline response outcomes takes a medium-term perspective, examining impacts in the year 2030. This choice is deliberate. Formulation of airline responses beyond 2030 would significantly reduce credibility as uncertainty regarding future business models, financial performance of the airline industry, cost levels and the survival of individual carriers becomes increasingly large. The choice of the year of analysis does have implications for the results. Growth in demand is delayed under the Relative Decline of Europe scenario and this results in benefits to passengers from capacity expansion accruing mainly after 2035 under airline response outcome 4.
The airline response-aviation scenario combinations are evaluated in terms of passenger welfare impacts related to connectivity gains (more flights and destinations), changes in competition levels (lower fares) and reduction in airline scarcity rents (lower fares), compared to the do minimum scenario.
The system currently employed for allocating slots for take-off and landing in London airports, with most slots allocated free of charge to incumbent airlines, means that rents accrue mainly to airlines.
Airline scarcity rents arise when potential demand exceeds the physical airport capacity to accommodate airline seat supply, as is currently the case at Gatwick and Heathrow. Airline rents accrue as air ticket prices increase to balance supply and demand and clear the market. Ticket prices are higher than they would be if all demand was accommodated. Airport expansion will reduce airline scarcity rents, reflected in lower airfares and lower airline revenues.
The welfare gains assessed arise mainly from the lower travel costs for UK and non-UK residents that result from runway capacity expansion at either Gatwick or Heathrow and the airline responses that unfold. The SEO Netcost model is used to estimate the effects for the year 2030 for the four airline responses outcomes.
We find that reductions in airline scarcity rents make up the majority of the consumer welfare gains. All tested airline responses, including expansion of the hub operation at Heathrow, produce benefits for passengers from competition. Welfare benefits for passengers in 2030 for each of the airline response outcomes are summarised in figure 1.1.
………….. and there is a figure showing benefits to UK passengers and Non-UK passengers under the different scenarios ……………
The outcomes are not directly comparable as they reflect different scenarios for the overall development of aviation and the global economy and are strongly affected by differences in the pattern of GDP growth assumed. It should be noted that beyond 2030 the point-to-point airline response in the Relative Decline of Europe scenario following Gatwick expansion would be expected to begin to generate more substantial welfare gains.
Based on our assessment, we conclude the following main points.
1. For each of the airline responses expansion of Gatwick and Heathrow produces welfare benefits for passengers.
2. The reduction in airline scarcity rents is the most important element of the consumer welfare impacts of airport expansion for all airline response outcomes.
3. All tested airline responses produce benefits from competition, including those with an expanded hub operation at Heathrow, and all produce connectivity benefits.
4. Around 55% of total welfare benefits accrue to UK residents in all airline responses. In the OD [OD probably means origin / destination traffic – the actual places people come from and go to, rather than just the air travel part of their trip. The Commission do not define it. AirportWatch note] market, leisure traffic accounts for about three quarters of the consumer welfare gains.
5. Total consumer benefits are highest in the scenario assuming point-to-point traffic growth at Heathrow (airline response 2) and low-cost gateway development at Gatwick (airline response 3).
6. The lowest total consumer benefits are found in airline response 4, which assumes point-to-point growth at an expanded Gatwick in the Relative Decline of Europe scenario.
7. An important factor in explaining the differences between airline responses is the fact that different demand growth rates are used, depending on the Airports Commission scenario that applies for each airline response. Until 2030, growth in the Low-cost is King scenario is higher than in the Assessment of Need scenario or the Relative Decline of Europe scenario. This difference between the demand scenarios leads to higher overall welfare gains in airline responses 2 and 3 (which both assume a Low-cost is King scenario) compared to the Assessment of Need (airline response 1) and Relative Decline of Europe scenarios (airline response 4).
8. The effects quantified relate to direct welfare benefits for passengers. Changes in surface transport access conditions and the consequences of expansion in allowing passengers to switch to a more convenient airport in terms of access are not included. Similarly, wider economic effects from improved connectivity of the London area have not been quantified.
[The document does not mention noise or environment once, though it does mention carbon due to carbon capped etc scenarios. It does not appear to consider “welfare” of anyone other than passengers, or the costs of the noise impacts or other environmental harm. ]
11.11.2014 – links to the main consultation documents. Technical suporting documents at link below.