The Business Case for Airport Expansion - London Chamber of ...

London Chamber of Commerce has 10,000 business customers across the capital,ranging in size from multi-national companies such as BT and Thames Water to soletraders.Without exception, our policies are always informed by the experiences of ourmember companies. It is only by putting London’s businesses first that the capitalcan maintain its outstanding record for creating well-paid jobs, leading the world inservice provision and being Europe’s favourite location for foreign direct investment.For further information or to discuss this report, please contact:James Ford, public affairs managerLondon Chamber of Commerce and Industry, 33 Queen Street, London EC4R 1AP(T: 020 7203 1889 or E: jford@londonchamber.co.uk)This report was originally published in March 2006. This revised and updated editionwas issued in September 2007Cover Photo © Nigel Howard1

IndexQuotes 3Executive Summary 51) Introduction 72) The importance of aviation to London businesses 9The economic benefits of airports and aviationDoing business globallyThe City and the economics of air travelWhere and why business choose to locateCurrent Access and Capacity Issues3) The Future of Aviation 15What is driving air transport growthIncreased demand for aviationAccessing new and emerging markets4) Failing to expand: the implications of air transport growth 21What happens if UK airport capacity fails to expand?The cost to the UK economyRegional and international competition5) Policy Solutions 26Taxing demandTraffic management versus new terminals and runways6) Conclusion 30Contributors 32Endnotes 332

QuotesGlobal Communications Ltd, operations director“Good air links are very important to us. 95% of our turnover is from outside the UKand 95% of our customers are outside the UK.”“If UK airports run out of capacity in the future, we would take indirect flights from theUK and pick up the connections in the major European Hubs – Amsterdam Schipholor Paris Charles De Gaulle.”South American Agency Ltd, Daniel Olarieta, director“I would like to see more routes especially from regional airports such as Luton sothat we do not have an over reliance on Heathrow.”Nissin (UK) Ltd, Marcus Marsh, operations manager“The trickiest issues currently facing us are the high crude oil costs and securityregulations. These regulations take more planning and increase the amount ofrecords needed which raise admin costs.”Freight forwarder, general manager“If the routes we want are not available, we truck the goods to Paris/Amsterdam andfly them from there.”Chandler Freight Ltd, Steve Nicholson, operational director“Government should give tax relief for cargo regarding the airport taxes. Use moresophisticated security technology.”Vario Creative Limited, Martin Seymour, director“We would like to see a combination of expansion and taxes. I do not want thegovernment to go too mad with development.”EOD Contracts Ltd, John Morrison, general manager“Government should do more forward planning. Put in place alternative road and railinfrastructure. Transport more freight by rail so that fewer trucks clog the roads tothe airports.”Environmental solutions business, business manager“There is a need for people to meet one another face to face. Even videoconferencing is not enough when you are meeting people from different cultures.”Pelican Cargo, Mark Thompson, general manager“Heathrow is a nightmare because of the traffic congestion. Queues at freight doorsat peak times (Friday pm) cause delays.”Diamantis International Limited, Stephen Horrey, director“If capacity is not increased the UK will start losing business, tourism and trade.Eventually profits will decrease.”3

Consultancy firm, managing director“The government should put a cap on air travel costs, streamline travel to airportsand reduce the cost of travel to airports to a minimum. Heathrow express should be aminimal charge.“Building new airports is not the answer. Most of our new business travel is toEurope, and we can not be alone in this. The choices of travel to Europe are limitedand expensive. If access to Europe was made cheaper and swifter, the number of airpassengers would decline.”Rogers Chapman, Andrew Gilling, divisional director“Security is becoming more of an issue. There is poor resource allocation. Forexample, there is a lack of staff, leading to a long passenger process.”Cadogan Tate Group Limited, Jonathan Hood, executive vice chairman“The government needs to put more intelligent planning into transport management.Take action and do it rather than discuss.”English language school, market development“An increase in tax to levy demand could really affect the industry because the UK isalready such a high cost destination.”Royal Mail, Cathy Way, head of network planning“A reduction in Royal Mail’s ability to use airports in South East England at night-timewould mean that a next day mail service between this part of the country andnorthern England, Scotland and Northern Ireland would be severely impaired.”Potatoes International Ltd, Lennie Taylor, director“A very significant part of our turnover is spent on travel, so cost is an importantissue.”Certification body, manager“The Government should deal with capacity. Heathrow terminal 5 will probably beclose to capacity as soon as it opens. Kuala Lumpur was built on projected figures,not today’s. The government should plan taking this into consideration. Determinewhere people want to fly to and from.”Sutch and Searle, Michael Donoghue, director“I am all for improvements. I think every aspect of Heathrow should be continuallyimproved. At the moment it is a bit fragmented.”Rembor and Partners Ltd, Eugene Rembor, director“If airports failed to expand, I would have to use alternative means of transport whichwould increase costs”.“My clients come to London to look to set up businesses in the UK. Therefore, theiroverall impression of the London transport system is very important. A failure toexpand would give clients a bad view of London.”4

Executive Summary• Aviation plays a vital role in the London and UK economies, allowingcompanies to access distant markets and source new customers or suppliers.It also serves as a powerful business magnet, attracting investment fromoverseas and encouraging foreign and multi-national companies to locate inthe South East.• However, airport capacity has failed to keep pace with the dramatic increasein demand for air transport services and a number of airports serving Londonare expected to reach saturation point in the next few years.• London airports also face increased competition from rivals on the Europeanmainland. Amsterdam Schiphol and Paris Charles de Gaulle airports alreadyhave five and four runways each respectively while Frankfurt plans to open afourth runway in 2009. Munich Airport, Germany’s second hub, will open athird runway in 2010 and this summer will overtake London Heathrow in termsof the number of destinations served for the first time.• Media coverage of the subject of the future of UK air transport has alwaysbeen dominated by the aviation sector. But this issue also affects manybusinesses in other sectors and it is important that these firms also add theirvoice to the campaign in support of aviation expansion. This report aims totest the argument for airport expansion by engaging directly with those firmswho rely on air services to do business.• The LCCI conducted detailed telephone interviews with 50 company directorswhose firms rely upon airports to do business but were not in aviation sector.• Almost three quarters of these firms said they would consider using analternate airport if there was insufficient capacity at their usual airport. Justover a sixth of firms said they would switch their operations to a rivalEuropean hub, such as Amsterdam or Paris.• Seven-tenths of firms cited costs as the biggest barrier they currentlyencountered when trying to access air services in the South East. A quartersaid that they currently had trouble finding the necessary direct air transportroutes for their business.• Just over half said that surface transport access to airports was a barrierwhilst a quarter said they experienced delays when trying to access airservices.• As a result of this research, the LCCI is making the following policyrecommendations:oSteps should be taken to allow the introduction of mixed modeoperations at Heathrow. The LCCI understands that the Departmentfor Transport plans to consult on this subject in Autumn 2007 andurges that, if this leads to a positive endorsement of mixed mode,efforts should be made to move to mixed mode as quickly as possiblethereafter.5

oooThe Government should restate its support for airport expansionand inject renewed urgency into its plans to deliver expansion onschedule at Stansted and Heathrow. This should follow the DfT’sreview of progress on meeting the aims of the White Paper thisautumn. The business community is aware that the completion datefor a second runway at Stansted has already slipped from 2012 to2013 and remains concerned that a lack of progress on deliveringexpansion at Stansted could jeopardise the much needed expansionof Heathrow. It is imperative that the Secretary of State for Transportshould drive forward efforts to increase air capacity in the South East.Ways to streamline and speed-up the planning process for majorinfrastructure improvements at airports should be explored andimplemented as soon as possible.An unequivocal commitment to increasing airport capacity in theSouth East in line with the recommendations in the DfT Air TransportWhite Paper must remain an integral part of the London Plan.6

1) IntroductionThe London Chamber of Commerce (LCCI) has long appreciated the strategicimportance of airports and aviation to the London economy. Air transport is anessential component of the modern global economy, allowing sales staff to accessdistant markets and companies to source new customers or suppliers. The readyavailability of high quality air transport services underpins London’s status as apremier business location in a highly competitive international environment. No othercity provides as great a frequency and choice of international destinations andcarriers.However, the rapid growth in demand for air transport services over the past twentyfive years has not been matched with an equal increase in capacity at airportsserving London and the South East. No new runways have been built in 50 years.With the rate of growth in demand set to accelerate over the coming years,passengers could face the prospect of widespread delays, severe congestion andfalling standards of service and reliability – not to mention less choice and lesscompetition over carriers, prices and destinations. In 2001 the European CommissionWhite Paper European Transport Policy for 2010: Time to Decide, concluded that‘Europe will not be able to cope without new airport infrastructure’ – a view shared bythe UK Government who subsequently committed to build at least two new runwaysin the South East by 2020.Rival airports on the continent have not been slow to expand. In 2006 Madrid BarajasAirport opened two new runways (bringing its total up to 4) while in the Summer 2006Munich Airport overtook Heathrow in terms of destinations served for the first time.Heathrow’s main hub competitors, Paris Charles de Gaulle and Amsterdam Schipholhave four and five runways each respectively. A fourth runway will open at FrankfurtAirport in 2009.However, airport expansion has a growing number of staunch critics. Environmentaland local residents’ groups – many of whom have been actively opposing any and allgrowth in UK air transport services for years – have campaigned vociferously againstthe government proposals. The Stop Stansted Expansion campaign hired aprofessional spin doctor to boost their fight against a second runway at the Essexairport while residents in Sipson have brought in EarthFirst! – one of Europe’s mostexperience direct action protest groups – to advise on ways to embolden their effortsto stop a third runway at Heathrow. Some commentators have likened the growth ofthese grassroots anti-airport groups to the rise of the militant road protestors of themid 1990s.This report seeks to flesh out the argument that it is not just businesses in theaviation sector that support airport expansion. Other firms who rely on air services totransport goods, access customers or source suppliers are also not just strongadvocates for expansion but also fearful of the economic consequences of failing tomeet demand for air services. Opinion research conducted through the LCCI LondonBusiness Leaders Panel in February 2006 found that 29 per cent of firms ratedaccess to airports as ‘very important’ for their business and only 36 per cent of firmsfelt their was no need for airport expansion in the South East.7

The LCCI also conducted detailed telephone interviews with a further 50 companydirectors from firms that rely on airports and aviation to do business. Theseinterviews sought to ascertain not just how important aviation was to their businessbut also to gauge their views on airport expansion and the problems they facedaccessing air transport services.8

2) The importance of aviation to London businesses“Typically, sectors of the UK economy which we are likely to dependon for future growth make relatively heavy use of aviation. The veryfact that these sectors are growing fast means that they represent anever larger proportion of national output. The implication of this is thatthe future health of the UK economy as a whole is likely to becomemore dependent on aviation. Conversely, it implies that restrictions onthe expansion of aviation could constrain overall economic growth.”Oxford Economic Forecasting, The Contribution of the AviationIndustry to the UK Economy (1999)Aviation is an important contributor to the UK economy. In 1998 the aviation industrycontributed £10.2 billion to GDP (1.4 per cent of the total). Aviation exported £6.6billion of services (some 11 per cent of the UK total for exports services) and afurther £35 billion of exported goods (more than 20 per cent of total exports). Theindustry contributed at least £2.5 billion to the UK exchequer.In the same year aviation employed 180,000 people in the UK – making it acomparable industry to car manufacturing, hotels or telecoms in terms of size.Heathrow alone generates over £5 billion in wages alone each year for the Britisheconomy. 1 However, while aviation itself is a major employer and makes asubstantial contribution to GDP, employment and the exchequer the sector’s realeconomic significance is as a catalyst to other economic activity. For every personemployed in aviation three other jobs are supported through the supply chain,induced effects and jobs depending on inbound and outbound tourism. ACI Europehas estimated that for each million passengers handled, each European airportsupports around 3,000 jobs – about half of them in the immediate area. 2The OEF report The Contribution of the Aviation Industry to the UK Economyestimates that direct employment in aviation is projected to increase by 30,000 by2015 to 210,000. This would mean the aviation industry is set to employ one thirdmore people than motor manufacturing and would become a bigger employer thanthe chemicals industry. Aviation is also expected to generate a further 290,000 jobsindirectly through the supply chain by 2015, (90,000 more than 1998 levels). 3The economic benefits of airports and aviationThe aviation industry has played a major role in the work and leisure of millions ofpeople since its inception in 1949. It promotes an improved quality of life and helpsto improve living standards, while facilitating tourism, generating economic growthand alleviating poverty.Aviation plays a major role in tourism, which is the UK’s largest invisible export.According to the Department for Culture, Media & Sport, UK tourism directly employs1.75 million people in 125,000 businesses (7 per cent of all jobs) and accounts forbetween 4 and 5 per cent of GDP. 4 Two-thirds of all foreign visitors to the UK arriveby air and spend 75 per cent of the £11 billion spent by foreign tourists in the UKeach year. The link between aviation and tourism is particularly strong in London: athird of all arrivals at Heathrow are foreign tourists and foreign visitors to Londonspend an estimated £7 billion a year. Leisure and tourism account for between 6 and8 per cent of the London economy and the sector employs about 290,000 people in9

the capital. Just over 17 per cent of all UK jobs in visitor attractions are based inLondon and GLA Economics has estimated that in 2000 the market value for visitingLondon’s museums, historical sites and visitor attractions alone was £380 million. 5Air freight is an important part of the aviation business and is essential for firmssending urgent documents via freight mail, transporting perishable goods or itemsthat are time critical. AICES, a trade organisation which represents companieshandling international express documents and package shipments employs over29,000 people directly, supports a further 68,000 jobs indirectly and is responsible forover 95 per cent of the international courier and express shipments moved throughthe UK every day. 6 A study by ATAG has shown that ‘40 per cent of the value ofinter – regional trade in manufactured goods is transported by air, whichcorresponded to a value of approximately US$ 1,750 billion in 2004’. 7 According tothe OEF, the UK express industry carried over 67 million shipments to, from or withinthe UK in 2001. 8Air freight is vital to the success of the UK economy and the businesses that operatewithin the sector. In 1998, the UK transported 2.1 million tones of freight, includingpharmaceuticals, spare parts for cars and ships, computer components, diamondsand fresh fruit and flowers. Freight carried included an estimated £35 billion of UKexports, over 20 per cent of all UK exports of goods by value, and £41 billion ofimports. In sectors such as computers and electronics, the speed at whichcomponents are getting ever faster or hang larger capacity means that companiescannot hold large stocks without the risk of being left with obsolete and unusableproducts. Quick and effective distribution of components and products in response todemand is therefore essential. 9Air freight has helped land locked countries import and export goods with greaterease, where the movement of goods via sea may prove too expensive. Manydeveloping countries have also seen the benefit of next day delivery services with themovement of perishable such as fresh fruit, vegetables, fish and cut flowers, whichform the main basis of their exports. 10Interviews by the LCCI have shown that a large number of freight businesses areseeking alternative means of transporting their cargos. Due to the high costs of flyinggoods directly from airports in the South East to their destinations, it is commonpractice and more cost effective to truck goods to the continent and fly them fromParis Charles De Gaulle or Amsterdam Schiphol. A director from a freight companyhighlighted this when he said: “If the routes we want are not available, we truck thegoods to Paris/Amsterdam and fly them from there.” Another problem directorsexperience is a lack of direct routes when flying goods. This seems to be solved bythe earlier example of trucking the goods to other European airports where thedesired routes are available.If the UK economy is to remain competitive, and businesses are to be successfulwhen tendering for new contracts, airports in the South East must be more attractivethan their European competitors.Doing business globallyThe GLA Economics study of London’s trade with the rest of the world shows that theUnited States and the European Union are very important as export markets to theUK. The service sector is a large exporter, with 40 per cent of exports to the UnitedStates being finance, business, insurance and travel. The UK also exports 22 percent of services to the European Union. When looking at the London economy, it is10

clear that it mirrors the national economy in terms of exports, with London being aservice led economy. London’s goods exports number £8.6 billion, while servicesexports are £28.3 billion. This is around 33 per cent of the UK service exports. Ananalysis of London’s exports shows fund management with finance and insurancebeing top and consulting, legal services and advertising also being important exports.London hosts more foreign banks than any other financial centre, including NewYork, Tokyo, Paris and Frankfurt. The goods exported include oil and gas, publishingand chemical products. However, London’s biggest export is London itself throughtravel and tourism. 11 Consequently, London’s export base is services (includingtourism), and not goods. The service sector will have further opportunities to expandin the future and London’s international transport links must allow for this, as moreand more service based businesses need to meet with international clients on a faceto face basis rather than via email or on the phone.Research by the CEBR and the Corporation of London has estimated that some702,000 jobs in London – about 18 per cent of the total – ‘exist as a result ofLondon’s ability to act as an internationally competitive business cluster’. Demandfrom other EU countries alone supports 22 per cent of London’s ‘City-type activity’ –approximately 72,000 jobs. 12A spokesman for Global Communications Ltd said that ‘good air links are veryimportant to us. Some 95 per cent of our turnover is from outside the UK and 95 percent of our customers are outside the UK’. Andrew Gilling of Rogers Chapmansaid: “Good air links are very important to the business. The majority of demand inHeathrow is driven by the airport.” John Morrison of EOD Contracts Ltd said thatgood air links are ‘absolutely essential’ to his business. This feeling was shared bythe majority of respondents who commented that air links are ‘vital, very importantand critical’ to their business.The City and the economics of air travelResearch by the Corporation of London and OEF in 2002 identified air services asbeing of ‘critical importance’ to companies in the City and the Central LondonBusiness District (CLBD). The importance of air services to business in London, andparticularly within the Square Mile, is more pronounced than in the rest of the UK fortwo reasons: the City and CLBD has a high concentration of financial services firms,which on average spend six times as much on air services as the UK businessaverage; and the fact that London firms are typically much more international thantheir counterparts in other areas of the UK.Survey work in support of this research found that 70 per cent of firms in the City andCLBD considered air services to be critical for business travel by their staff and 50per cent considered these services to be critical for travel by their clients to meetthem. Data from the Civil Aviation Authority (CAA) Passenger Survey showed that8.3 million people flew from London airports on business in 2000. A breakdown ofthis data revealed that almost 70 per cent of business travellers from the City wereemployed in the ‘banking and business’ sector. Some 46 per cent were going to meetwith clients and a further 46 per cent were travelling on ‘internal company business’.According to the report: “This importance of air services is reflected in the number ofbusiness trips that take place either to visit or by the employees of Londoncompanies. Taking into account journeys by staff that either start or finish at home aswell as at the office, we estimate that in total there were between 13.5 million and14.0 million flights to or on behalf of companies in the CLBD in 2000. The total11

number of flights to or on behalf of companies in the City was between 2.35 and 2.43million. So, companies in the City are associated with nearly 5 per cent of all UKbusiness trips by air – almost four times their share of UK employment – and those inthe CLBD with around 30 per cent.” 13Where and why businesses choose to locate“Good air transport links are one of the key considerations affectingwhere international companies choose to invest - it is unlikely to bepurely coincidence that the UK is the number one European countryboth as a recipient of foreign investment and in terms of the frequencyand choice of international destinations offered for air travel.”Oxford Economic Forecasting, The Contribution of the AviationIndustry to the UK Economy (1999)Airports not only facilitate international trade but also influence companies’ decisionsas to where to locate offices. According to the 2006 European Cities Monitor,businesses rated “easy access to markets, customers or clients” and “transport linkswith other cities and internationally” as the first and third most important factors whendetermining where to locate. These factors were considered more important thanstaff costs, availability of office space, ease of travel within the city, and the climategovernments create for business. On both criteria London topped the poll, helping itretain its title as Europe’s best city for business. 14 Some 30 per cent of the largestEuropean companies have their headquarters in the UK, compared with 18 per centin France and 16 per cent in Germany. 15A separate study, commissioned by the Corporation of London and based oninterviews with European finance directors, showed that London is the mostimportant international financial centre for European companies – behind only thefinancial centre of the companies’ home countries. 16Current access and capacity issues“The pressures on existing capacity in the South East of England arealready more severe than those in the rest of the country. AtHeathrow, for many years now the demand for runway capacity hasexceeded the available supply for virtually all hours of the day – andthere are very stringent controls on the number of flights permitted atnight. At Gatwick, demand exceeds supply for much of the day,especially in summer. At Stansted, there is no spare capacity in somepeak hours, and demand is continuing to grow extremely rapidly. Onlyat Luton, and to a lesser extent, at London City is there significantcapacity available in peak hours.”Department of Transport, The Future of Air Transport (2003)Research by ACI Europe, the organization that represents airport operators, hasshown the extent to which capacity falls short of demand at the major Londonairports. By comparing the total number of slots initially requested by air carriers withthe total number of slots allocated, ACI Europe found that ‘unsatisfied demand’ (theextent to which requests exceed allocations) was ‘particularly significant’ at Londonairports. Unsatisfied demand at Heathrow was 21 per cent and at Gatwick it was 34.3per cent in 2002. This was noticeably higher than at Barcelona (14.9 per cent) and atParis Charles de Gaulle (13.9 per cent). At Stansted, Copenhagen, Dublin,Düsseldorf, Frankfurt, Madrid, Milan Malpensa, Munich, Palma, Amsterdam Schipholand Stockholm unsatisfied demand was not as high but demand still exceeded the12

number of slots available. Disturbingly, ACI Europe concluded that unsatisfieddemand at Heathrow was actually assumed to be much higher than observed bytheir research due to the fact that many airlines do not even request a slot knowingthat these airports are very congested and therefore the chances of successfullybidding for a slot are slim. 17The LCCI London Business Leaders Panel survey of February 2006 shows that aquarter of respondents found it difficult to find the routes they wanted. One salesmanager said “I Fly from Heathrow and Gatwick and I would like to fly from Lutonmore, but I am limited by the flights and routes”, while Eugene Rembor ofmanagement consultants Rembor and Partners sees a lack of availability of someroutes as an issue, stating “I would like to see better connections from City airport toHamburg and Berlin”. The business manager of a technology consultancy businesssaid: “It would be useful for there to be more direct links to central Asia and EasternEurope from London, as I normally have to get a connection in Germany.”A number of the company directors surveyed reported that they already encounteredproblems accessing air transport in the South East. The major problem, cited by 35out of the 50 company directors interviewed by the LCCI, was cost, especially interms of fuel. Peter Jenkin of Delta Electrial Company Ltd said: “We would likegovernment to cut tax on fuel to decrease the cost of flights.” While Mark Thompsonof freight forwarders Pelican Cargo stated that if capacity is not increased in thefuture, ‘costs would increase and we would have to look for alternative transport’.Madeline Mansfield of cosmetics manufacturers Smart Beauty UK Ltd felt thatthe cost of domestic flights was too expensive; “I used to fly EasyJet from Stansted toLiverpool, but eventually the tax was more than the flight, so I had to stop using thisservice.” And Lennie Taylor of importers and exporters Potatoes InternationalLtd said: “A very significant part of our turnover is spent on travel, so cost is animportant issue.”Road access to airports was a major bug bear, cited by half of respondents.According to one company director: “Out of 100 flights a year, five are missed due tocongestion on the motorway going to Heathrow.” Another director said: “Vehiclesoften queue in and around the airport. As a result, goods have missed flights.” Thedirector of one consultancy business said that: “keeping traffic flowing in and out ofHeathrow is important to reduce the delays on the motorways.” Heathrow receivedparticular criticism for its road access.Almost half of company directors cited visa problems or security as a current issuefacing their business, or an issue which they expect to affect their business in thefuture. A spokesperson from a freight haulers said: “The security process can becostly and add a day to the process, as the goods are taken off the van and putthrough an x-ray machine and then put back on the van.” The head of internationalretail for a large manufacturing company described his problems in attaining visas:“The government should put in place bilateral agreements with other countries tomake visa applications easier. When you arrive in Turkey, you then have to queuein the airport to get your visa. Therefore, this is a form of tax.”An important issue to company directors was delays, with just over a quarter ofrespondents citing this as a problem. These delays could be for a number ofreasons, including industrial action, due to traffic on the motorways or because ofsecurity checks. A director from a haulage company said: “There is always a lack ofcapacity. Vehicles often queue in and around the airport. As a result, goods havemissed flights.” While the director of a consultancy firm felt that action should betaken to solve industrial disputes. He said: “the Government should manage the13

issue of ground staff unions and traffic controllers more strictly. Take themanagement away from private companies.” The executive travel administrator ofan international retailer said ‘delays can cause staff to miss connections, whichincreases costs’.14

3) The Future of AviationAir travel is growing at a rapid rate. Forecasts currently show global airportpassenger growth at over 4 per cent per year to 2020 when there will be anestimated 7.4 billion air passengers travelling annually – equivalent to every man,woman and child on earth making at least one flight every year. 18The DfT White Paper The Future of Air Transport (2003) predicted dramatic growth indemand for airports serving London. More than half of the total UK demand that isforecast for 2030 is for airports in the South East yet the South East is the region withthe most severe capacity constraints already. In 2003 60 per cent of all UK airjourneys were made through South East airports.Future air passenger growth breaks down across London’s five airports as follows:• London Heathrow handles 67.7 million passengers a year but this isexpected to increase to 85 million a year by 2030• London Gatwick serves 34 million passengers a year and BAA estimatesthat, even without an additional runway, passenger volumes could reach up to45 million some time after 2015.• London Stansted currently serves 23.8 million passengers a year. By 2008passenger numbers are likely to hit 25 million and by 2015 the number couldbe 35 million even without a second runway. With a second runway andmixed mode operation, Stansted could accommodate 76 million passengersby 2030.• London Luton airport handled 9.4 million passengers in 2006 but this isexpected to rise to 30 million by 2030 – a fourfold increase. This will requirethe maximum use of a full-length runway.• London City airport handled 2.4 million passengers in 2006 but this could beincreased to more than 5 million a year with some further development.What is driving air transport growth?A number of factors have driven the growth of aviation. In Europe the successfulliberalization of the air transport industry during the 1990s allowed new airlines andnew airline business models to enter the market, forcing the traditional ‘flag carriers’to compete. Particularly successful amongst the new entrants to the EU aviationmarket have been the low fares airlines (LFAs). The European Low Fares AirlineAlliance (ELFAA), which represents 11 of Europe’s LFAs, estimate that in 2004 therewere about 60 LFAs in Europe, accounting for 24 per cent of total intra-Europeanflights. ELFAA members alone operated a fleet of 249 aircraft serving 900 routesconnecting more than 200 cities and transporting nearly 60 million passengers. Thelow fares sector has grown at an average of 35 per cent per annum since 1999 andis expected to continue to grow strongly over the years to come, accounting for morethan 40 per cent of intra-European flights by 2010. According to ELFAA: “The UK isby far the most developed market for low fares services, with several low faresairlines having established operational bases there and with low fare share of15

scheduled traffic at airports approaching 50 per cent.” According to figures fromEasyJet low cost carriers account for 40 per cent of seats on offer at London airportsbut just 13 per cent of seats at the two Paris airports. 19The system of managing air traffic in Europe has also driven growth. According to theEuropean Commission White Paper (2001), the system of ‘hub’ and ‘spoke’ networksof airports has also contributed by encouraging airports to operate more frequentflights with smaller aircraft to minimize delays between making connections at hubairports: “Unfortunately, not only does this cause congestion on the ground; it alsomeans that far more effort is necessary to control all the aircraft trying to use a limitedamount of space.” While the introduction of the next generation of larger aircraft,such as the Airbus A380, will increase capacity on long haul routes it nonethelessposes problems for ground traffic management. The embarkation anddisembarkation of up to 600 passengers per flight instead 150 to 200 will increasethe strain on security checks, baggage handling services, customer check-in facilitiesor customs checks and generate additional connecting traffic. 20Increased demand for aviationAir traffic in Europe is set to double over the next fifteen years with the number ofEuropean air travellers a year expected to hit 2 billion by 2020. While globalpassenger numbers are expected to grow by an average 4.3 per cent per annum, thegrowth rate for air travel in Europe is significantly higher at 5-6 per cent a year.The following table clearly shows the growth in activity at UK airports since 1994:YearActivity at UK AirportsAir TransportMovements(000)1994 1,548 1,5891995 1,611 1,7031996 1,685 1,7721997 1,763 1,9431998 1,868 2,0801999 1,958 2,1892000 2,045 2,3142001 2,095 2,1462002 2,094 2,1952003 2,160 2,2082004 2,277 2,371(Source: Civil Aviation Authority)Freight Tonnes(000)The problem of diminishing airport capacity is not limited to the UK. According tostudies by Eurocontrol in 2004, 70 per cent of the 50 largest European airports havealready or almost reached saturation point in terms of ground capacity and severecapacity constraints are forecast for the year 2025 when it is expected that 17 percent of demand for air traffic – approximately 3.7 million flights – per annum will notbe able to take place. 21It is not just the volume of passengers and the number of air traffic movements thatchange over the coming years. The pattern of air transport use is also expected toshift. The Department for Transport expects that services at Heathrow will be16

increasingly focused on domestic and international routes of importance to businesstravellers. Heathrow is already the airport of choice for UK business with morebusiness travellers preferring flights from Heathrow than Gatwick, Luton, Stanstedand London City combined. (Currently 47 per cent of Heathrow passengers fall intosocial groups A and B compared with just 39 per cent of Stansted passengers). TheDfT Air Transport White Paper concluded: “Additional capacity at Heathrow wouldgenerate the largest direct net economic benefits of any new runway option.” LondonCity Airport already serves a niche market of business travellers and, as the airportclosest to the proposed Olympic Village, is expected to see growth related to Olympicactivities ahead of 2012.Although the future growth of LFAs is likely to remain centred around Stanstedprimarily, LFA’s are also developing routes from other airports. EasyJet has unveilednew routes from Luton and Gatwick, including services to new destinations outsidethe EU such as Marrakech, Istanbul and Croatia. The LFA sector as a whole isexpected to continue to grow at a rapid rate and exert competitive pressure on majorcarriers in terms of price.Accessing New and Emerging MarketsThe 2006 European Cities Monitor, which gauges business attitudes to doingbusiness in Europe’s major cities, demonstrated a clear trend for businesses to lookto Eastern Europe or the emerging markets in India, China or Asia-Pacific as sites forfuture expansion ahead of locations in Western Europe. London and Paris will remainthe most popular locations for new offices in Western Europe, but with predictedexpansion well below the levels that cities in Eastern Europe, such as Warsaw,Prague and Budapest will see. 22CityNumber of companiesexpecting to locate overthe next 5 yearsWarsaw 50Moscow 45Shanghai 43Budapest 34Prague 30Beijing 29London 17Paris 9According to research by the Centre for Economics and Business Research for theCorporation of London, business with the 10 ‘new’ European economies that joinedthe EU in 2004 generated only 2,500 City-type jobs in London in 2005 but, the reportconcluded, ‘as these economies mature, we forecast that their international financialservices are likely to grow extremely rapidly, reaching twenty times their current sizeby 2015’. In fact, the CEBR calculated that Poland’s international financial sectorwould be larger than that of a number of Eurozone countries within a decade – whichmay explain why Warsaw ranked so high on the European Cities Monitor. 2317

Furthermore, on average over 65 per cent of the banking sector in these accessioncountries is in foreign ownership, with the financial and banking institutions of olderEU members – such as the UK – dominating. By contrast only about a third of banksin the City of London are in foreign ownership while the average for the Eurozone isfor 20 per cent of banks’ capital to be owned by non-domestic financial institutions. 24The accession states in Eastern Europe have particularly under-developed airportinfrastructure compared to other EU states, according to the European Commission.The Commission’s White Paper European Transport Policy for 2010: Time to decide(2001) concluded that ‘few [of the then ‘candidate countries’] have sufficient capacityto cope with the traffic growth which enlargement will inevitably bring’.Aviation growth is not just about Europe though. Further down the European CitiesMonitor 2006 table of results, the number of companies planning to locate in Mumbai,Mexico City, New Delhi, Dubai, Tokyo, Sao Paulo, Buenos Aires, New York orSydney exceeded the likely expansion in Dusseldorf, Lyon, Geneva, Stuttgart,Hamburg, Zurich, Stockholm, Oslo, Amsterdam, Rome or Munich. This demonstratesthat while Europe remains at the centre of global business, other economies andcountries are becoming increasingly significant players in a more interdependent,globalised world.These growing economic powers present significant opportunities for the UK, andLondon in particular. While the UK is unable to compete with these emerging marketsin terms of labour or production costs for goods, the rapid pace of economic growthmeans that they will have to import professional services on a large scale. Thefinancial and business services sector is the largest in the London economy andLondon’s trade in services outweighs its trade in goods by a factor of 3 to 1 – placingthe capital in a strong position to capitalize on these new markets. According to GLAEconomics: “These countries [China, India, Russia and Brazil] are expected torepresent extremely important markets for the UK and other developed countries. Forexample, Chinese and Indian consumers will purchase more insurance of varioustypes as their incomes increase, and as businesses grow they will require more ofthe professional, legal, accountancy and advertising services in which London has acompetitive advantage. In particular, the need in China and Russia for reform of thefinancial system and of state-owned enterprises suggests opportunities for legalservices firms as well as for financial and general business consultants. In India,there may be similar opportunities as the economy becomes increasingly exposed tointernational markets and competition, and as greater investment flows into thecountry.” 25China, for example, has one of the fastest growing economies in the world and in2001 was the sixth largest economy and the fourth largest trading nation. Over thepast ten years China has averaged annual growth of over 8 per cent, with the rate ofgrowth accelerating in the past few years. In 2002 and 2003 annual growth reached8.3 per cent and 9.1 per cent respectively. The Chinese authorities want to quadrupleGDP between 2000 and 2020 – a mission that will require average growth of 7.6 percent. 26Aviation is seen as playing a major role in driving economic growth in China. TheGeneral Administration of Civil Aviation of China (GACAC) recently unveiled plans todouble the size of the Chinese aviation industry over the next five years by buying100 new jetliners and recruiting 1,000 pilots each year. China is already the fastestgrowing aviation market globally and air traffic to the country doubled in the past fiveyears alone. Since 2000 passenger numbers have risen by 105 per cent to 138million a year and the combined fleet of China’s air companies has grown from 527 to18

863. Each day there are an estimated 5,000 flights and more than 11,000 takeoffsand landings in Chinese airports. Of the 354 orders that have been placed withBoeing for the new 787 ‘Dreamliner’ long range aircraft, 60 have been ordered byChinese Airlines – making it the largest single customer. Chinese Southern Airlineshave ordered a further 10 Dreamliners.Investment in planes and pilots is also backed with increased investment in airportinfrastructure. In 2005 a new mega-terminal was opened at Guanzhou as part of aplan to double capacity at the airport by 2009 while Pudong Airport recently opened asecond runway in its bid to quadruple the number of terminals and handle 80 millionpassengers a year. China has also recognised that the 2008 Olympics will boostpassenger numbers and work is underway on Terminal 3 of Beijing CapitalInternational Airport which is due for the completion by 2008. This facility will be420,000 square metres and upon completion will be the largest airport in the world –overtaking Hong Kong and Heathrow. 27According to one company director: “Shanghai is a main route. The market needs toadjust itself in terms of capacity. Six years ago only Virgin flew to Shanghai – nowthere are 4 or 5 operators.” This sentiment was echoed by another director who said:“It would be useful for there to be more direct links to central Asia and EasternEurope from London as I normally have to get a connection in Germany.”The continued growth of India will also have a significant impact upon the Londoneconomy as the capital is well-positioned to exploit this market. According to GLAEconomics, London is home to 144,000 people born in India and a further 290,000people of Indian ethnicity. There are up to 10,000 Indian-owned businesses inLondon and between 1997 and 2004 the UK capital was the destination for nearlyhalf of all Indian foreign direct investment (FDI) projects in Europe. At the same time,UK businesses are also investing in India. In 2003 the UK sent £3 billion in exports toIndia and UK companies invested more than £210 million in FDI in India. Between1995 and 2003 UK companies’ FDI assets in India rose from £500 million to £1,300million. This economic activity also impacts upon air travel: each year up to onemillion passengers fly directly between India and London’s airports. 28The following tables, which show the growth in passenger traffic and cargo volume atmajor airports between 2003 and 2004, demonstrate how air transport use isincreasing steadily at the major European airports but expanding rapidly in Dubai andthe ‘tiger’ economies of Asia.AirportPassenger TrafficPercentageincrease(2003-2004)GlobalRanking(2004)London Heathrow 6.1 3 rdFrankfurt 5.7 7 thParis CDG 5.5 8 thBangkok 25.8 14 thHong Kong 36.1 17 thBeijing 43.2 20 thLondon Gatwick 4.8 23 rdSingapore 23.1 26 th(Source: ACI Europe)19

AirportPercentageincrease(2003-2004)Cargo VolumeGlobalRanking(2004)Hong Kong 15.7 2 ndSeoul 15.8 5 thFrankfurt 11.4 7 thSingapore 10.0 8 thShanghai 38.1 14 thParis CDG 9.4 15 thAmsterdam 8.4 16 thLondon Heathrow 8.6 17 thDubai 22.2 18 thKuala Lumpur 12.6 29 th(Source: ACI Europe)As every plane that takes off from an airport must also land at its destination,increased air traffic at airports in China, South Korea, Singapore and Thailand notonly means increased traffic flows between Asian airports but also generatesadditional traffic at destination airports in Europe and North America.20

4) Failing to Expand: The implications of air transport growthWhat happens if UK airport capacity fails to expand?“In 20 years’ time, more than 60 of the region’s major airports (whichtogether handle 90 per cent of Europe’s commercial air travellers) willbe seriously congested. By then the first to feel the pressure oncapacity will be the 20 busiest airports, which are predicted to havebecome saturated with traffic for up to ten hours a day as they try tomeet the increased demand.”ACI Europe/Eurocontrol, A Vision for European Aviation (2005)While a long period of sustained aviation growth and ever increasing demand is astrong positive indicator on the vitality of the global economy, it nonetheless possessignificant challenges for existing transport infrastructure. According to the WhitePaper The Future of Air Transport, pressures on existing capacity in the South Eastare already more severe than those in the rest of the UK: “At Heathrow, for manyyears now the demand for runway capacity has exceeded supply for virtually allhours of the day…At Gatwick demand exceeds supply for much of the day,especially in summer. At Stansted, there is no spare capacity in some peak hours,and demand is continuing to grow rapidly.”Increased air traffic volumes are already impacting upon levels of service andreliability and will continue to do so if capacity issues are not addressed. One of themost obvious symptoms of demand outpacing supply is an increase in airport delays.Eurocontrol has reported that the proportion of air traffic delays that occurs at airports(as opposed to en route) doubled from 23 per cent in 2000 to 46 per cent three yearslater. 29Company directors interviewed by the LCCI predicted that air transport costs wouldrise if airport expansion did not take place. This would either be a result of demandoutstripping supply – which would allow air transport providers to charge more – orfrom an increase in taxation on air transport aimed at managing demand.The cost to the UK economyEconomic research has warned that there were ‘dangers to the UK economy’ fromrestricting the supply of aviation. OEF calculated that a 25 million a year reduction inthe number of passengers, spread across all types of passengers, would mean thatGDP would be expected to be nearly £4 billion a year (in 1998 prices) lower by 2015.That is equivalent to about three times the annual net capital spending by theDepartment of Health and all NHS Trusts. A 25 million a year reduction is relativelymodest – equivalent to a 3.5 per cent annual growth rate in passenger numbersrather than the predicted 4 per cent annual growth rate. If passenger numbers did notincrease above 1998 levels then the estimated effect would be to reduce the level ofGDP by 2016 by around 2.5 per cent – more than £30 billion a year. 30The Department for Transport’s own figures estimate that 73 million passengerjourneys a year will be lost to the UK air system if there is no increase in runwaycapacity in the South East by 2030 while the economic benefits of future airportexpansion could be worth £18 billion to the UK economy. According to ThamesValley Economic Partnership, the ‘continued growth of Heathrow and Gatwick in line21

with the Future of Air Transport White Paper is fundamental to the economic successof the region’. 31The majority of those interviewed by the LCCI warned of dire economicconsequences if airport capacity did not expand. The director of one manufacturingfirm said ‘a decrease in capacity would make it harder to respond to customerrequirements around the world, leading to a loss of business. The business wouldloose out to cheaper competition from places such as the far east’. Eugene Rembor,of Rembor and Partners, warned that the image of the UK would suffer: “My clientscome to London to look to set up businesses in the UK. Therefore, their overallimpression of the London transport system is very important. A failure to expandwould give clients a bad view of London.”A number of other businesses were concerned about the broader impact that failingto expand would have on the UK economy. For example, Stephen Hooray of stockcontrol software providers Diamantis International Limited warned that ‘ifcapacity is not increased the UK will start losing business tourism and trade.Eventually profits will decline’. Andrew Gilling of property consultants RogersChapman estimated that the impact of failing to expand ‘would be significantbecause growth within the economy and the locality would be curtailed’. Anotherdirector warned that not meeting demand would create a ‘false market’.A lack of capacity would also impact upon freight costs. Marcus Marsh of Nissim(UK) Ltd, a freight forwarding company, warned that ‘the amount of cargo beingmoved would be restricted, market forces would apply and costs would increase’.This view was echoed by Mark Thompson of Pelican Cargo who said ‘costs wouldincrease and we would have to look for alternative transport’.Only one company director saw a positive outcome from the failure to expand airportcapacity: “The facilities we currently have can be managed better. The industryshould get better organized and bring in cargo quicker and sooner. For example, Julyto November is the busiest period for shipping goods for Christmas. Could they beearlier?”Regional and International Competition“Across Europe, airports fall into two categories: those withinsufficient traffic and those with insufficient capacity.”ACI Europe, Building for the Future: Paying for the Airports ofTomorrowAirports on the European mainland are already rising to the capacity challenge.According to Momberger Airport Information, some US $55 billion will be invested innew infrastructure and facilities by 2025. Major projects include the US $ 5.67 billionplan to build a fourth runway and third terminal at Frankfurt and the US $5.4 billionplan for new passenger and cargo terminals and two new runways at Madrid Barajas.According to ACI, airports across Europe have increased their spending oninfrastructure by 10.7 per cent in recent years, spending some US $ 11.2 billion andUS $12.4 billion in 2003 and 2004 respectively.In 2005 ACI Europe concluded that ‘airports operate in an increasingly competitiveenvironment. Different kinds of competition among airports can be identified, such ascompetition to attract new services, passengers and freight, competition for theprovision of services at airports and competition between transport modes’. 32Heathrow is the UK’s only major international ‘hub’ airport – its principal competitors22

are Amsterdam Schiphol, Frankfurt and Paris Charles de Gaulle. Without a hubairport, the UK would not be able to compete in some markets and many more UKpassengers would have to transfer and make long-haul flights from hub airports onthe European mainland. However, Heathrow’s hub status is threatened by capacityconstraints and, without significant capacity increase, would not just be unable tocompete with its three main rivals but would be increasingly overtaken by Rome,Madrid and Milan airports. 33Without a third runway or the introduction of mixed mode operation, by 2010Heathrow will have slipped from being Europe’s second largest airport (in terms ofthe number of destinations served) in 1990 to being ranked eighth. At presentHeathrow serves 186 destinations worldwide - a fall of 19 per cent from the 227destinations served in 1990. According to research by British Airways, by 2015Frankfurt, Paris Charles de Gaulle and Amsterdam Schiphol are likely to havebecome the three largest airports in Europe, each serving around 300 destinations.There is also likely to be a considerable capacity gap between these ‘big three’airports and their nearest competitors, which would be airports serving around 200destinations. Heathrow could serve as few as 152 destinations by 2015, roughly thesame number that Brussels would serve. But, with a third runway, Heathrow wouldbe the fourth largest airport in Europe, serving 229 destinations. 34One emerging rival to Heathrow is Munich Airport, which has seen rapid expansion inrecent years and is now Lufthansa’s second hub airport following the opening of itssecond terminal in 2003. When it opened in 1992 Munich was ranked as 51 st in theworld airport rankings but had climbed to 37 th position by 2000. It is currently rankednumber 8 in Europe for passenger numbers and has a maximum capacity of 45million passengers but already has planning permission for a third runway, which isexpected to be complete by 2010. Munich has served more destinations direct thanHeathrow since Summer 2006.How they compare: Top 8 European Airports by Destinations Served (All Services)Winter 05/06 compared with Summer 06AirportDestinations Served (All Services)Winter 2005/2006 Summer 2006Frankfurt 261 293Paris CDG 235 237Amsterdam Schiphol 224 245London Heathrow 201 202Munich 190 211Rome Fiumicino 149 162Madrid 149 152Milan Malpensa 147 15323

How they compare: Top 8 European Airports by Destinations Served (All Services)Summer 96 compared with Summer 06AirportDestinations Served (All Services)August 1996 August 2006Frankfurt 320 293Paris CDG 256 237Amsterdam Schiphol 228 245Rome Fiumicino 211 162London Heathrow 209 202Munich 178 211Madrid 177 152Milan Malpensa 53 153The LCCI company director interviews found that a sixth of the businessesconcerned were already considering relocating their air operations to either Paris orAmsterdam if capacity became too constrained in the London area in future. Giventhat the distance between London and Manchester (approximately 320km) is onlymarginally shorter than the distance between London and either Paris or Amsterdam(about 350km each) and that both Schiphol and Charles de Gaulle airports are majorinternational hubs, this is unsurprising. Three of the companies interviewed said theywould relocate their business as well as shifting their air services.British Airways has also calculated that failing to expand capacity at Heathrow andStansted would actually see the number of destinations available from the fiveLondon airports decrease. Heathrow would most probably drop some destinations inorder to compete on frequency on other routes. Meanwhile, although Luton andStansted would be likely to add routes, these would probably duplicate the mostprofitable, high demand routes already served by Heathrow and Gatwick. However,additional destinations are only likely to be added if Heathrow and Stansted wereexpanded – if just Stansted were expanded it is unlikely there would be as manybenefits in terms of additional destinations as the network would duplicatedestinations already served by other London airports. (See table, below)Number of Destinations Served (Totals per Airport)2004 2015(No extracapacity)2015(STN 2 ndRunway)2015(LHR 3 rdRunway)2015(Runwaysat LHRand STN)Heathrow (LHR) 198 152 149 229 225Stansted (STN) 117 143 220 141 216Gatwick 145 145 143 143 142Luton 31 49 49 49 48Total 491 489 561 562 631Overall Number of Destinations Served by London318 249 257 326 333(Source: British Airways, 2004)24

Without expansion at Heathrow or Stansted, by 2015 London’s four largest airportswould collectively serve fewer destinations in total that Amsterdam Schiphol orFrankfurt did as individual airports. Paris, with its two airports, would serve 383destinations by 2015. 35A lack of routes or serious capacity bottlenecks would also have adverse knock-oneffects for businesses. A large number of those businesses surveyed by the LCCIsaid that they would consider relocating their business or using a different airport ifthe South East experienced capacity problems. A director with manufacturers GlobalCommunications Ltd said: “If UK airports run out of capacity in the future then wewould take indirect flights from the UK and pick up the connections in the majorEuropean hubs – Amsterdam Schiphol or Paris Charles de Gaulle.” The director ofone consultancy business said: “I would seek other routes and means ofcommunication…We would consider switching to another airport. We would notconsider relocating [the business] to a new airport. However, we would follow thetrend of greater distribution of employees and increase working from home. Wewould not move our headquarters.” Another director said: “The UK would be at adisadvantage. People would use Paris, Amsterdam instead. If I were to switchairports it would probably be a European hub such as Frankfurt.” This view wassupported by John Morrison of commercial bomb disposal experts EODContracts who said his firm would consider moving to Paris.Interestingly, some companies said they would look to switch from an over crowdedairport around London to another, less crowded one within the region. The director ofone consultancy business said he would happily switch from Heathrow to LondonCity ‘if its capacity was increased’.Some companies already use other UK or European airports. According to onecompany director said ‘if the routes we want are not available, we truck the goods toParis/Amsterdam and fly them from there’. Another company director said ‘I woulduse Birmingham more’. One logistics company warned ‘freight is already beingtrucked to Scotland and flown from there to save costs’. This view was echoed byanother respondent who said: “Eventually goods will just move out from Paris orAmsterdam. We currently do this because it is sometimes cheaper to transport thegoods by truck to the continent then freight them from there, rather than London.”Jonathan Hood of Cadogan Tate Group Limited, a company which specialises infine art transport, warned that failing to expand air capacity would haveenvironmental impacts as well as affecting UK competitiveness: “In the long termthere would be fewer carriers servicing the UK directly. Therefore, there would bemore trucks on the roads.”25

5) Policy SolutionsTaxing DemandWith demand for air travel increasing at a dramatic rate, most aviation expertsbelieve that the most practical solution would be to increase the capacity of theairports by building more runways, terminals and airports. Alternately, governmentcould also try to increase the cost of flying to reduce consumers demand. Therefore,an increase in aviation fuel tax could price consumers out of the market and thusmanage demand more effectively, rather than increasing capacity.There are, however, limits to the effectiveness of using tax to regulate demand.Research by the then Department for Environment, Transport and the Regions(DETR) in 2000 concluded that that a 100 per cent increase in the price of aircraftfuel would reduce air travel demand by only 10 per cent, making it a highly ineffectivemeasure. 36 A study by the Institute of Public Policy Research (IPPR) calculated thatthe effect of combining Air Passenger Duty with charging Fuel Duty on aviation fuel,making flights subject to VAT, removing Duty Free from flights outside the EU,ending the ‘single till’ regulation which combines retail revenues with landing chargesand creating an environmental tax would ‘see demand rise more sustainably’ from160 million flights in 1998 to 236 million in 2020 – rather than the predicted 400million. The real benefit from such a punitive tax regime would not be theenvironment but rather the UK exchequer, which would receive £6.5 billion in extrarevenue per year. 37According to the Air Transport Action Group (ATAG): “the aviation industry financesits infrastructure through user charges and also pays taxes to national treasuries.”The aviation industry currently covers all infrastructure costs through the payment ofcharges by the airlines to the airports, which in most cases are privately owned.Alongside these charges, the industry also pays taxes to local and nationalauthorities via air passenger duty. ATAG states that the ‘taxes levied in the UnitedStates on aviation exceeded $14 billion in 2004, corresponding to 25 per cent ofairfares’. 38 In the UK, air passengers pay about £1 billion per year in air passengerduty, while the government only spent £199 million on air transport in 2002. 39Therefore, the aviation industry is in effect currently being taxed twice, while alsomaintaining its own infrastructure (something no other sector in transport is requiredto do). The road and rail sectors in the UK are subject to road tax, fuel tax and VATlevied on rail tickets. Aviation is in comparison self sufficient and also makes acontribution to public funds. In the UK, aviation’s net contribution to public funds isaround US$ 14 per 000rkm while government subsidies for rail correspond to US$ 43[per 000rkm]. 40Research by the LCCI has shown that the air freight industry faces additional taxescompared to air passengers. Several of the company directors interviewed by theLCCI highlighted that the charges they face are on the increase and already includea security charge, a fuel charge and a separate freight charge. Michael Donoghue,director of freight forwarders Sutch and Searle, stated that the major issue hisbusiness is facing is the ‘various surcharges such as fuel’. Steve Nicholson ofChandler Freight Ltd suggested that: “Government should give tax relief for cargoregarding the airport taxes.”26

These charges are levied by individual airlines and there is no uniform charge acrossthe industry. One company director said: “The biggest strain is the fuel surcharge.Specifically for air freight, this is 30 – 40 per cent more than the normal surcharge.”The already debilitating surcharges that are currently being levied on the industry arecausing many businesses that fly goods from Heathrow to reassess this. It is oftencheaper for them to truck their goods from the Heathrow area to the Continent andthen fly them from competing European hubs such as Paris Charles De Gaulle. It isfelt by the industry directors that were interviewed by the LCCI that it is unsustainableto increase taxes further. The result would be less freight flying directly fromHeathrow. As one company director stated: “Eventually goods will just move outfrom Paris or Amsterdam. We currently do this because it is sometimes cheaper totransport the goods by truck to the continent then freight them from there, rather thanLondon.”The director of firms who used air services to transport staff rather than goods werealso critical of the current tax regime. Medeline Mansfield of Smart Beauty UK Ltdsaid: “I used to fly EasyJet from Stansted to Liverpool, but eventually the tax wasmore than the flight, so I had to stop using this service.” Another director said anincrease in tax ‘could really affect the industry because the UK is already such a highcost destination’.The Chicago Convention was signed in December 1944 and contained the basicrules for civil aviation and emphasized that the future development of internationalcivil aviation can greatly help and preserve friendship and understanding among thenations of the world. The most fundamental part of the convention was that it alsolaid out that there should be no tax on aviation fuel. Therefore, until this conventionis overruled, it seems highly improbable that any government would be able to levy atax on aviation fuel. If some demand is stemmed by tax, there will still be a need forfurther capacity. We live in a truly global economy and it is vital that businesses areable to sell their goods in the global market and communicate with one another, on aface to face basis. For those reasons, it is impractical to try to reduce demand bylevying tax, which will make the UK uncompetitive when all statistics show that theforecasted demand for flight will increase from 155 million passengers in 2010 to 290million passengers in 2030 in the London area. 41Aviation has also been suggested as a means of tackling problems in the developingworld. At a G7 summit in London (chaired by Gordon Brown) on February 5 th 2005,the Treasury agreed to consider the French and German governments proposals fora new tax on aircraft fuel as a way of helping Africa meet the MillenniumDevelopment Goals of cutting poverty, reducing infant mortality and getting morechildren into school. 42 This seems to be a tax on tourist travel and not business,implying that the cost of a family holiday will rise under the proposals. The plan couldalso seriously affect the profits of the airline industry and would be unpopular with theindustry. If this proposed tax was added to all routes and affected business users aswell, it would certainly reduce demand, as some consumers, especially familieswould not be able to afford the increase. British Airways described the tax as ‘absurdand illogical’ and said there was ‘no reason why airline passengers should be singledout to make a contribution to aid projects’. A spokesman for EasyJet said: “the lastthing the aviation industry needs is ministers meddling and indiscriminately imposinga tax for a purpose that has nothing to do with the airline industry.” 43The environment is an important factor to consider when weighing up the benefits ofincreasing air capacity. However, aviation is the most environmentally friendlymeans of transport. “Aviation accounts for only 2 per cent of global carbon dioxideemissions, far less than emission coming from road transport (18 per cent) and27

power stations (34 per cent). UK domestic flights account for 0.5 per cent of UKemissions, much less than the 21 per cent coming from road transport and 26 percent from power stations.” 44The aviation industry has already taken steps to introduce more environmentallyfriendly aircraft to reduce the negative effects of aviation. For example, at Stanstedairport, Ryanair and EasyJet (the airports biggest operators) are phasing out olderand noisier Boeing 737 – 200s and replacing them with aircraft such as Airbus 319and Boeing 737 – 800, next generation aircraft in terms of tracking, fuel efficiencyand quietness. 45Many of the company directors interviewed over the telephone by the LCCI were notunsympathetic to concerns about the environmental impact of aviation. According toMartin Seymour of design consultants Vario Creative Limited: “We would like tosee a combination of expansion and taxes. I do not want the government to go toomad with development.” Another director said the Government should ‘delayexpansion and take stock of what we already have’ and John Woodham of SebelEurope, a manufacturing firm, felt ‘there should be more pressure on airlines tobecome more environmentally friendly’. However, the majority of directors felt thatenvironmental considerations should not outweigh the economic arguments in favourof expansion. One company director said that ‘the environment should be taken intoconsideration, but expansion is still needed’. The managing director of a defence andsecurity consultancy firm said: “Ideally environmental should be taken intoconsideration. Realistically, business travel is vital. Pollution and traffic are also majorissues but we can’t stop trading or doing business as a result. Expansion is vitalregardless.”Better traffic management versus increased capacityGiven the long lead-in time required for securing the necessary planning consent andthen building new facilities, terminals or runways at airports compared to the rapidincrease in demand that is currently being seen, airports are increasingly looking tomaximise their use of existing capacity. ACI Europe and Eurocontrol, the Europeanorganization for safety in air navigation, have launched an initiative called AirsideCapacity Enhancement (ACE) to identify where capacity gains can be achievedwithout new infrastructure.The biggest contribution to addressing air traffic management issues is the SingleEuropean Sky (SES) initiative which aims to create a more efficient air trafficmanagement system by reducing fragmentation between EU states, standardizingthe systems in use and creating ‘flexible air space between civil and military users’.According to one aviation expert: “The SES initiative is at the forefront of efforts, notonly to open up the skies so that more efficient routes can be used – reducing costand pollution – but also make the business of controlling aircraft journeys andregulating Air Navigation Service Providers a more pan-European process.” 46 A twoyear ‘definition phase’ for the SES was launched in June 2005 with €60 millionfunding from EUROCONTROL and the European Commission. However, theaviation industry do not expect to see any benefits from the air traffic researchundertaken as part of the SES initiative before 2009 or 2010. The implementationphase of the SES is expected to run from 2007 until about 2020 in total. 47 Butimproved management of air traffic in the skies or at take off is only part of theequation. More aircraft taking off or landing also causes congestion on the ground atairport terminals.28

However, according to Roy Griffins, director general of ACI Europe, better trafficmanagement will never be enough to meet the dramatic rise in demand for air travelthat is forecast: “Regardless of how far you squeeze the most out of existingcapacity, the reality is that new runways and terminals are the only way toaccommodate future demand. Without new capacity, there will be less competition,less choice, higher air fares, less economic growth, and – ultimately – fewer jobs.” 48According to Paul Wilson, head of airport operations at Eurocontrol, while thereremains latent capacity at many European airports without having to build newinfrastructure, there are exceptions such as Heathrow or Gatwick. 49 Even theEuropean Commission has conceded that rethinking how airports operate ‘will not beenough and Europe will not be able to cope without new airport infrastructure’.This is a view shared by several of the company directors interviewed by the LCCI.According to Stephen Hooray of Diamantis International Ltd: “The governmentneeds to address capacity. A greater emphasis needs to be put on this because it isnot going to go away.” Barry Bennett of Waterloo School of English said thegovernment should ‘go as environmental as possible without sacrificing capacity’whilst Everett Lakeland of British Overseas and Export Trading Ltd said theyshould ‘speed up the process of building new airports and terminals.’A CBI survey in December 2005 found that 92 per cent of businesses rated airportexpansion in the South East as ‘Very’ or ‘Quite’ important. The CBI described this asa ‘widespread response from business’, irrespective of the sector, size or area of thefirms surveyed. 5029

6) ConclusionPrior to the publication of the Government’s White Paper The Future of Air Transport,the London Chamber of Commerce warned that failing to meet all reasonabledemand for air services in the capital ‘would be for the London economy to effectivelyopt out of the twenty-first century’. While the LCCI acknowledges the concerns ofanti-airport groups and accepts that expansion may have adverse effects on localcommunities in terms of noise and pollution, we remain convinced that the economiccase for airport expansion is compelling.By far the most critical issue facing Government aviation policy is not whether, or towhat degree, the forecast demand for air transport should be met but rather whenand how. While airports on the European mainland are expanding to rise to thechallenge of air transport growth, very little progress has been made towardsdelivering the extra capacity promised for the region in the White Paper. The region’sair capacity will be stretched by 2010 but the additional runway at Stansted – the firstto be built in the South East since the 1940s – will not be operational before 2013 atthe earliest.London airports already lag behind their European competitors. Amsterdam Schipholairport already has five runways, Paris Charles de Gaulle has four and Frankfurt willopen its fourth in 2009. Madrid Barajas Airport opened two new runways this yearalone – doubling its total. Munich Airport will open its third runway in 2010 and as ofthis summer will serve more destinations than Heathrow. The LCCI interviews foundthat a number of firms are already considering shifting their air operations toAmsterdam or Paris if capacity becomes constrained at London airports.Unless the Government takes action urgently, the UK risks entering a period ofrelative decline in air transport which could damage businesses, reduce tourism, andlimit choice for freight operators and air passengers alike. The Government’s ownfigures predict that 73 million passenger journeys a year would be lost to the UK airsystem if there is no increase in capacity in the South East by 2030 – costing the UKeconomy £18 billion. Any relative decline air services could undermine London’sposition as the premier global business centre.As a result of the research conducted in support of this report, the LCCI is making thefollowing policy recommendations:ooSteps should be taken to allow the introduction of mixed modeoperations at Heathrow. The LCCI understands that the Departmentfor Transport plans to consult on this subject in Autumn 2007 andurges that, if this leads to a positive endorsement of mixed mode,efforts should be made to move to mixed mode as quickly as possiblethereafter.The Government should restate its support for airport expansionand inject renewed urgency into its plans to deliver expansion onschedule at Stansted and Heathrow. This should follow the DfT’sreview of progress on meeting the aims of the White Paper thisautumn. The business community is aware that the completion datefor a second runway at Stansted has already slipped from 2012 to2013 and remains concerned that a lack of progress on deliveringexpansion at Stansted could jeopardise the much needed expansion30

of Heathrow. It is imperative that the Secretary of State for Transportshould drive forward efforts to increase air capacity in the South East.ooWays to streamline and speed-up the planning process for majorinfrastructure improvements at airports should be explored andimplemented as soon as possible.An unequivocal commitment to increasing airport capacity in theSouth East in line with the recommendations in the DfT Air TransportWhite Paper must remain an integral part of the London Plan.31

The LCCI would like to thank the following companies which made on therecord contributions to this reportArends International Ltd, Freight and Storage Solutions, MiddlesexBritish Overseas and Export Trading Ltd, Import and Exporter, MiddlesexCadogan Tate Group Limited, Fine Art, Residential and Business Moving, LondonChandler Freight Ltd, Freight Forwarders, EssexDelta Electrical Company Ltd, Manufacturing and Distribution, BedfordshireDiamantis International Limited, Stock Control Software, LondonDJG Exhibition Freight Services Ltd, Freight Forwarders, SurreyEOD Contracts Ltd, Commercial Bomb Disposal, KentEssex Industries Ltd, Import and Exporters, LondonFalcon London Ltd, Exporters of Laboratory and Medical Equipment, LondonFortis Bank, Financial Services, LondonGlobal Communications UK Ltd, Manufacturers, EssexHLB International, Professional Services Network, LondonInternational Fiscal Services, International Tax Specialists, LondonIvey International, Freight Forwarders, BerkshireNissim (UK) Ltd, Freight Forwarders, MiddlesexOverall International Air Cargo Ltd, Freight Forwarders, MiddlesexPelican Cargo, Freight Forwarders, SussexPotatoes International Ltd, Imports and Exporters, LondonRembor and Partners Ltd, Management Consultants, LondonRogers Chapman, Property Consultants, MiddlesexRomanian Property Connection Ltd, Property Development and Estate Consultancy, LondonSebel Europe, Manufacturers, BuckinghamshireSmart Beauty UK Ltd, Manufacturers, DorsetSmart Solutions, Defence and Security Consultants, KentSouth American Agency Ltd, Freight Forwarders, KentSutch and Searle, Freight Forwarders, MiddlesexVario Creative Limited, Design Consultants, LondonWaterloo Scholl of English, English Language School, London32

Endnotes1 www.futureheathrow.org/economy/htm, ‘Heathrow for Business’2 Quoted by Ian Goold, ‘The Capacity Crunch’ in Eurocontrol/ACI Europe, A Vision forEuropean Aviation, 20053 Oxford Economic Forecasting, The Contribution of the Aviation Industry to the UK Economy,November 19994 DCMS, Tomorrow’s Tourism, February 19995 GLA Economics, Spending Time: London’s Leisure Economy, November 20036 www.aices.org/about.htm7 ATAG, the Economic and Social Benefits of Air Transport, 20048 Oxford Economic Forecasting, The Contribution of the Aviation Industry to the UK Economy,Novermber 19999 Oxford Economic Forecasting, The Contribution of the Aviation Industry to the UK Economy,Novermber 199910 ATAG, the Economic and Social Benefits of Air Transport, 200411 GLA Economics, London’s Trade with the rest of the World, July 200412 CEBR/Corporation of London, The City’s Importance to the EU Economy 2005, February200513 Corporation of London/OEF, Aviation Services for the City of London, October 200214 Cushman & Wakefield, Healey & Baker, European Cities Monitor 2006, September 200615 Airline Operators Association, UK Aviation Facts, 200516 CEBR/Corporation of London, The City’s Importance to the EU Economy 2005, February200517 ACI Europe, Study on the use of airport capacity, May 200418 ACI Europe ‘ACI forecasts strong air traffic growth through 2020’, February 2005 and IanGoold, ‘The Capacity Crunch’ in Eurocontrol/ACI Europe, A Vision for European Aviation,200519 ‘Easyjet concerned at huge hike in Paris airport charges’ Easyjet press Release, 12 January200620 European Commission Directorates-General Energy & Transport, European TransportPolicy for 2010: Time to Decide, 200121 Eurocontrol and ECAC, Joint Study on Airport Capacity: Challenges to Growth, December2004, and Eurocontrol research ‘Airport Slots, FPL and ATFM Slots’, April 200422 Cushman & Wakefield, Healey & Baker, European Cities Monitor 2006, September 200623 CEBR/Corporation of London, The City’s Importance to the EU Economy 2005, February200524 Ibid.25 GLA Economics, Our London. Our Future: Planning for London’s Growth II, November200526 GLA Economics, Enter the Dragon: An analysis of Chinese FDI into London, December200427 ‘China plans to double air traffic with 100 new aircraft a year’, The Guardian, 15 February200628 GLA Economics, From the Ganges to the Thames: An analysis of Indian FDI into London,June 200529 Quoted by Ian Goold, ‘The Capacity Crunch’ in Eurocontrol/ACI Europe, A Vision forEuropean Aviation, 200530 OEF, The Contribution of Aviation to the UK Economy, 199931 Thames Valley Economic Partnership, Review of Regional Economic Strategy 2006-2016,November 200532 ACI Europe, Building for the future: paying for the airports of tomorrow, April 200533 ‘Heathrow as a hub’ from www.futureheathrow.org.uk34 British Airways, Future Heathrow Presentation, May 2004 from www.futureheathrow.org.uk35 Ibid.36 DETR, Valuing the External Costs of Aviation, 200037 IPPR, Sustainable Aviation 2030, 200133

38 ATAG, The Economic and Social Benefits of Air Travel, 200439 Freedom to Fly Coalition, Air Travel, Tax and the Environmental Facts, 200340 ATAG, The Economic and Social Benefits of Air Travel, 200441 LCCI, Options for Growth: Meeting Demand at London’s Airports 2000-2005, 200042 ‘Brown: Tax on air travel could fund Africa Aid’, The Guardian, 6 February 200543 ‘Airlines ridicule EU’s Africa-aid ticket tax plan’, Daily Telegraph, 15 May 200544 Freedom to Fly Coalition, Air Travel, Tax and the Environmental Facts, 200345 BAA London Stansted, Corporate Responsibility Report 2004/05, October 200546 Simon Mitchell in Eurocontrol/ACI Europe, A Vision for European Aviation, 200547 Julian Moxon ‘SESAR – Pathway to the Single European Sky’ in Eurocontrol/ACI Europe, AVision for European Aviation, 200548 Quoted by Ian Goold, ‘The Capacity Crunch’ in Eurocontrol/ACI Europe, A Vision forEuropean Aviation, 200549 David Learmount, ‘Airports and European ATM’ in Eurocontrol/ACI Europe, A Vision forEuropean Aviation, 200550 CBI, London Business Survey, December 200534