Sir Howard Davies argues for new runway in order to keep air fares low – or get even lower

Sir Howard Davies, Chair of the Airports, writing a comment piece published in the FT, says if  “Britain is to keep pace in the global economy”, south east England needs an additional runway. But he says this would come at a high price, and the question is where the money is most effectively spent.  He says there will be a trend to more low cost long haul point to point traffic, and slightly more fuel efficient planes. And thus: “With additional runway capacity around London, these trends suggest more direct routes will be available to economically significant destinations, and an increase in the frequency of service on existing routes. Passengers and freight operators would benefit from the time saved from taking a more convenient or more direct route. There would be more airline competition, too, which would be likely to reduce costs.”  He does not mention the impact of a runway on the environment, nor noise or carbon emissions. Merely economics. His piece ends: “If this analysis is correct, removing the capacity constraint should benefit passengers, increasing the choice of routes and carriers, potentially at lower cost.”  So purely for the benefit of passengers, to give yet lower air fares (no VAT, no fuel tax, from May 2015 only two bands of APD, and minimal coverage by the ETS).
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Greater competition from airport expansion will spark fall in air fares, Airports Commission chairman argues

 

Airline ticket prices could fall spurred by greater competition if either Heathrow or Gatwick is allowed to expand.

The suggestion comes today from Airports Commission chairman Sir Howard Davies.

Writing in the Financial Times, he said: “If either is allowed to expand, there will be greater opportunity for competition between airlines, and ticket prices may therefore fall, offsetting the higher landing charges new capacity would entail.

“If this analysis is correct, removing the capacity constraint should benefit passengers, increasing the choice of routes and carriers, potentially at lower cost.”

New analysis prepared for the Commission by the International Transport Forum and SEO Economic Research, published this week, argues that UK aviation is likely to be driven by two developments.

“The first is the rise of inbound travel from emerging market economies and the associated rise in competition from airlines serving them,” said Sir Howard. “The growth of middle classes countries predominantly in south-east Asia is likely to lead to more point-to-point long haul traffic.

“The second development will be new aircraft that are coming into operation, notably the Boeing 787 and the Airbus A350 – both at least 20% more fuel-efficient than the models they replace.

“They are also quieter, meaning fewer local residents will be affected by noise. They will make it easier for lower-cost carriers to enter the long-haul market, though many have been ordered by network carriers that will also benefit from lower operating costs, potentially adding previously unviable spokes to their hub networks.

“With additional runway capacity around London, these trends suggest more direct routes will be available to economically significant destinations, and an increase in the frequency of service on existing routes.

“Passengers and freight operators would benefit from the time saved from taking a more convenient or more direct route. There would be more airline competition, too, which would be likely to reduce costs.”

He added: “The research also shows that London’s constrained capacity comes with a cost. Where demand for airport capacity exceeds supply, airlines can earn a return higher than the average cost of supplying a take-off or landing slot.

“Airports cannot capture these excess returns if their charges are capped, as at Gatwick and Heathrow.”

Sir Howard did not indicate a preference but said: “If Britain is to keep pace in the global economy, south-east England needs an additional runway.

“But this vital infrastructure will come at a high price, and the question is where the money is most effectively spent.”

The Commission will make its recommendation on additional capacity for the new government after next May’s election.

Consultation papers published last month suggest a price tag of up to £19 billion at Heathrow, for a full-length runway with related infrastructure; and about £9 billion at Gatwick.

“The numbers are huge but the private-sector owners of London’s largest airports believe the investment can be financed and will yield an acceptable return,” said Sir Howard.

“Airlines, and more importantly passengers, are concerned about what the investment will mean for the landing charges each departing passenger pays as part of the ticket price.

“At £20, Heathrow’s charges are already the highest in Europe, and we estimate they could rise to as much as £32. Gatwick’s are lower but would rise significantly.

“These large increases lead some to question the viability of all the proposals we are evaluating and to ask whether it might prove more cost-effective to expand regional airports instead.

“We considered that option in last year’s interim report and rejected it. While it is vital that other airports – including Stansted – expand, it is not possible to direct airlines to fly from airports where they do not believe demand is adequate.

“Constraining supply of take-off slots in the south-east, where demand is highest, would result in lower overall connectivity and a less efficient, less carbon-efficient network.

“Still, to assess whether expanded capacity in the south-east is likely to be a good investment, we need to consider the market reaction.

“Although we expect runways and terminals to be privately financed, some related public infrastructure spending will be needed — more at Heathrow than Gatwick.

“Forecasting airline and passenger responses is not simple. Few foresaw the dramatic growth in low-cost carriers at the expense of national airlines; will that continue? In particular, will the low-cost model spread to long-haul routes or will the attractions of the large network airlines (especially to time-pressed businesspeople) allow them to maintain or increase market share?

“Does the future lie with “hubs”, collecting and distributing traffic to smaller airports, or point-to-point traffic?”

http://www.travelweekly.co.uk/Articles/2014/12/18/51552/greater-competition-from-airport-expansion-will-spark-fall-in-air-fares-airports-commission.html
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Sir Howard’s letter:

 

Let London’s airports achieve potential

By Howard Davies

17.12.2014

“The Airports Commission I chair is working on a recommendation on additional capacity for the new government after next May’s election. The consultation papers we published last month suggest a price tag of up to £19bn at Heathrow, for a full-length runway with related infrastructure; and about £9bn at Gatwick. The numbers are huge but the private-sector owners of London’s largest airports believe the investment can be financed and will yield an acceptable return.

Airlines, and more importantly passengers, are concerned about what the investment will mean for the landing charges each departing passenger pays as part of the ticket price. At £20, Heathrow’s charges are already the highest in Europe, and we estimate they could rise to as much as £32. Gatwick’s are lower but would rise significantly.

These large increases lead some to question the viability of all the proposals we are evaluating and to ask whether it might prove more cost-effective to expand regional airports instead.

We considered that option in last year’s interim report and rejected it. While it is vital that other airports — including London Stansted — expand, it is not possible to direct airlines to fly from airports where they do not believe demand is adequate. Constraining supply of take-off slots in the south east, where demand is highest, would result in lower overall connectivity and a less efficient, less carbon-efficient network.

Still, to assess whether expanded capacity in the south east is likely to be a good investment, we need to consider the market reaction. Although we expect runways and terminals to be privately financed, some related public infrastructure spending will be needed — more at Heathrow than Gatwick.
Forecasting airline and passenger responses is not simple. Few foresaw the dramatic growth in low-cost carriers at the expense of national airlines; will that continue? In particular, will the low-cost model spread to long-haul routes or will the attractions of the large network airlines (especially to time-pressed businesspeople) allow them to maintain or increase market share? Does the future lie with “hubs”, collecting and distributing traffic to smaller airports, or point-to-point traffic?

New analysis prepared for the Airport Commission by the International Transport Forum and SEO Economic Research, published this week, argues that UK aviation is likely to be driven by two developments.

The first is the rise of inbound travel from emerging market economies and the associated rise in competition from airlines serving them. The growth of middle classes countries predominantly in southeast Asia is likely to lead to more point-to-point long-haul traffic.
The second development will be new aircraft that are coming into operation, notably the Boeing 787 and the Airbus A350 — both at least 20 per cent more fuel-efficient than the models they replace. They are also quieter, meaning fewer local residents will be affected by noise. They will make it easier for lower-cost carriers to enter the long-haul market, though many have been ordered by network carriers that will also benefit from lower operating costs, potentially adding previously unviable spokes to their hub networks.

With additional runway capacity around London, these trends suggest more direct routes will be available to economically significant destinations, and an increase in the frequency of service on existing routes. Passengers and freight operators would benefit from the time saved from taking a more convenient or more direct route. There would be more airline competition, too, which would be likely to reduce costs.

The research also shows that London’s constrained capacity comes with a cost. Where demand for airport capacity exceeds supply, airlines can earn a return higher than the average cost of supplying a take-off or landing slot. Airports cannot capture these excess returns if their charges are capped, as at Gatwick and Heathrow. If either is allowed to expand, there will be greater opportunity for competition between airlines, and ticket prices may therefore fall, offsetting the higher landing charges new capacity would entail. If this analysis is correct, removing the capacity constraint should benefit passengers, increasing the choice of routes and carriers, potentially at lower cost.”

The writer is chairman of the UK Airports Commission and a professor at Sciences Po http://www.sciencespo.fr/en

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See also

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.

http://www.airportwatch.org.uk/2014/12/commission-publishes-new-report-on-strategic-fit-for-its-consultation-on-possible-impact-of-runways-on-air-travel-cost/

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