The future of UK airprts

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 Despite that threat, successive UK governments have resisted pressure from aviation and business leaders to allow new runway construction that would ease airport capacity restrictions, which are particularly acute at Heathrow.

However, the forced sale of Gatwick and Stansted airports in 2009 and 2013 respectively by the previously dominant airport authority BAA has created a new competitive landscape among the UK’s southeastern gateways and added momentum to the runway debate. There is now a sense that a decision on new runway capacity may be closer than at any time in a generation.

In early October, the government-appointed Airport Commission, tasked with researching and identifying the best solution for London’s airport capacity challenges, revealed some conclusions from its initial research, including its belief that further runway capacity was essential in the UK’s southeast. To manage the predicted growth in flying, it said that “an attempt to rely on runways currently in operation would be likely to produce a distinctly sub-optimal solution for passengers, connectivity and the economy”, as well as being potentially more damaging to the environment.

But will the additional capacity go to Heathrow, Gatwick or Stansted – or all three? The answer to that question will remain a mystery until immediately after the next UK General Election in May 2015, when Airport Commission chairman Howard Davies will publish the Commission’s full report on long-term solutions.

He is understood to have received 58 different proposals, ranging from runway extensions to new green field locations and, indeed, ‘blue water’ sites, a reference to proposals supported by London Mayor Boris Johnson for a brand new airport to be built on reclaimed land to the east of the capital in the Thames Estuary.

In the meantime, following some further consultation, the Airport Commission – or what is sometimes called the Davies Commission – plans to make some interim recommendations in December on short-term options for easing capacity constraints. Davies ruled out the prospect of the general use of “mixed mode” as a short-term solution at Heathrow, a technique in which both runways are used simultaneously for take-offs and landings. This raises capacity at the expense of significantly increased noise emissions and is likely to be used only to increase the resilience of Europe’s busiest airport during events such as weather disruption. Instead, the Commission’s interim recommendations are expected to centre on improving rail and road links to London’s secondary airports – Gatwick, Stansted, Luton, London City, and Southend – after receiving several proposals “to make existing airports more appealing and provide some additional headroom”.

Speaking at the annual Airport Operators Association (AOA) Conference in late October, Davies gave little away in terms of what his final suggestions are likely to include, although he specifically did not rule out the option of recommending more than one additional runway.

Defining trends

But speaking at the same event, Michael McGhee, a founding partner of Global Infrastructure Partners (GIP), operator of Gatwick, London City and Edinburgh Airports, said he only expected one additional runway would be recommended, and he expects this to go to Gatwick. McGhee said that the global aviation industry is entering a new phase, characterised by greater competition, fresh thinking, new technology, and huge new investment. He highlighted four major trends and developments that are particularly reshaping the international aviation industry, affecting GIP and other UK airport operators and also the debate about London’s airport capacity needs. He listed these as the continuing expansion in the number of low-cost carriers (LCCs); new aircraft capabilities; the emerging Middle East mega-hubs; and increasing competition across the aviation sector.

Firstly, McGhee noted that LCCs have clearly emerged as the dominant model for short-haul air travel, and now also increasingly for medium-haul, thanks to their “irresistible” combination of streamlined processes, high aircraft utilisation and high load factors. “We think they will continue to expand and to evolve and drive growth into the market, and their dominance is now stretching beyond Europe to surrounding countries, as evidenced by new routes from Gatwick to places like Moscow, Istanbul and Oman.”

He observed that LCCs already account for 57% of all short-haul origin and destination traffic into and out of London. “Since 2000, LCCs have grown by more than 9% per annum compound in the local market. If you scoop that away, there has been negative growth of 5%,” McGhee said.

They are now also adapting to target business traffic “with growing success”. In the next phase of development, he expects to see higher frequencies on key routes, more product choice for different segments of the market, more penetration of the business market and the emergence of different types of LCCs – including those set up or bought by network carriers. “Vueling is a good example, and looks like a potential winner for IAG,” McGhee commented.

He pointed out that there is also evidence of increasing transfer passengers at the major LCC bases, “and especially at Gatwick, which is one of the biggest globally”. McGhee expects to see more interlining between LCCs and network carriers, as is already happening in Australia with Jetstar and Virgin Australia, with Air Asia X, with JetBlue in the US and WestJet in Canada.

“Airports that want to compete for LCC business, and that definitely includes us at Gatwick and Edinburgh, need to adapt to meet the needs of these new models or lose business to those who do,” he said. “That means more efficient operations, better collaboration with the airlines, better service levels for the airlines and choices for the passengers, and lower charges – along with good access to quick passage through the airport.”

He argued that, of the six ‘London’ airports, only Gatwick, Stansted, Luton and Southend can meet the exacting requirements of quick turnaround times and efficient airfield operations that are necessary for the high aircraft utilisation needed by the LCC business model.

In terms of his second major development highlighted, McGhee said the introduction of new-generation aircraft such as the B737 Max and A320neo would extend the range of LCC operations, “while the new long-haul hub-busting aircraft will enable direct services on long-haul routes which have historically been uneconomic.

“There are now nearly 2,000 (B787) ‘Dreamliners’ and A350s on order, and Gatwick sees this as a great opportunity, because a number of our airlines have already ordered Dreamliners with the intention of serving these new routes,” he said. In October, Norwegian, for example, announced three new long-haul routes from Gatwick – to New York, Los Angeles and Fort Lauderdale.

Thirdly, McGhee noted that the rapid expansion of the major Gulf hubs, soon to be joined by a new Istanbul airport, will have a tremendous impact on UK and other northern European gateways, due to their more favourable geographical location – and, importantly, financial muscle – to serve the rapidly growing markets in Asia.

“And, increasingly, these hubs are being fed directly from the regional airports, not just in the UK but across Europe, bypassing Frankfurt, Paris, and London,” he remarked. “Unsurprisingly, one of our key priorities at Edinburgh Airport is to establish a Middle Eastern route for this very reason.”

To emphasise the scale of this development, in the 10 years to 2012, Heathrow’s passenger numbers grew by 7 million to 70 million, whereas the traffic handled by Istanbul, Dubai, Doha, and Abu Dhabi grew in the same period by 100 million to 140 million, McGhee observed. Looking at aircraft, he points out that BA and Virgin have a combined total of about 110 aircraft on order, whereas the flag-carriers in these four emerging mega-hubs have nearly 800 on order, many of which are the new-generation long-haul aircraft.

McGhee’s fourth and final trend, greater competition “across the length and breadth of industry”, will be seen between airlines, between airports, and between airline-airport combinations, he considers. “Each of the developments I’ve been discussing has led to an increase in competition at the airport level, as have decisions that have been made by the policy makers and regulators,” McGhee said.

“Liberalisation has clearly revolutionised the airline industry, but thanks to the (UK) Competition Commission, we are beginning to see the benefits of competition in the London market, and now the Scottish market too. Gatwick has been competing in London’s LCC market with Luton, Stansted and now Southend, but it has also begun to target all traffic types, including long-haul, which has historically been the preserve of Heathrow,” he added.

All these developments, therefore, feed into the case for a new runway at Gatwick, McGhee insists, claiming that Gatwick is “much better placed” on many issues relating to competitiveness, particularly against Heathrow. “We see our greater operating efficiency, much lower charges, complementary catchment area and increasing flow of transfer and passengers from our growing short and medium-haul traffic network as providing the basis for competing vigorously both with Heathrow and internationally.”

New York, Paris, and Tokyo, all “enjoy the benefits of two or more main airports, and a two-gateway model, supported by other airports, will be attractive to London and provide the greatest convenience for the greatest number of passengers”, he argued.

The Davies Commission has made it clear that its recommendations will be made on the basis of a holistic assessment, not only on the type and location of capacity needed to deal with future demands but also on a broad range of other factors, including cost, McGhee added. He claimed that the cost of a new runway at Gatwick would be only about one-third that of a new runway at Heathrow, and produce far less disruption. Moreover, crucially, it would be far easier, politically, to deliver.

“Whatever the conclusion of its analysis, the commission must consider deliverability,” he said. “It was lack of deliverability that stopped previous attempts at new runways at Stansted and, most recently, at Heathrow. Unless the recommendation is deliverable in business, political, planning, environmental and legal terms, on a timely basis, then the whole exercise will prove to have been a waste of time and money.”

The carriers’ viewpoint

This is a point underlined by Willie Walsh, CEO of International Airlines Group (IAG), parent company of BA, BMI, Iberia and Vueling. Walsh so strongly doubts whether UK politicians have the political stomach to go ahead with a third runway at Heathrow that he has stated several times that he believes it will never happen in his lifetime. The 52-year-old went even further at the AOA Conference, claiming it will never happen.

Although Walsh’s comments may be partly designed to provoke a response from politicians, an invitation to prove him wrong, opponents of a third runway at Heathrow have demonstrated several times in the past the scale of the political challenge. Indeed, opponents include London Mayor Boris Johnson, although Johnson’s own favoured solution, a new-build airport in the Thames Estuary, is increasingly being seen as a non-starter because of the costs involved.

Michael O’Leary, CEO of Ryanair, believes the ‘Boris Island’ airport proposal is so over-ambitious and outlandishly expensive – “so pie in the sky” – that it makes the other more modest proposals, and his preferred option of building new runways at Heathrow, Gatwick, and Stansted, much more credible.

While that may have been unlikely under the old BAA-dominated regime, he believes it “could come to fruition pretty quickly”. He told the AOA Conference: “Now that the London airports have been broken up and are no longer controlled by a monopoly, I think actually you have three airport operators that are hugely committed to expanding capacity. So I see no difficulty with the government actually grasping the nettle at some stage and saying: ‘we have got to sort this out’.”

O’Leary has no doubts that the airports would pay for their respective runway expansions, and said that the infrastructure improvements required to support that would be “an awful lot less than if we come up with some crazy scheme to build a new airport in the middle of nowhere in the Thames Estuary, because you build upon the transport infrastructure that is already there in those three airports: the tubes, the trains and motorways.”

Pressed further, he was more positive about the prospects for expansion of Gatwick and Stansted, and said that in the new competitive environment, UK airport expansion and infrastructure projects will be more affordable than in the past, partly because they will be driven by the needs of LCCs.

“I think Gatwick, with the new ownership, will build a more sensible second runway; I think they should. I think Stansted will certainly build a second runway in time, and a second terminal, and it won’t cost £2 billion (US$3.2 billion) – it will probably cost a couple of hundred million pounds, because those are the facilities that our customers want and therefore those are the facilities that we now have to serve. We have finally seen an end to the kind of stupidity that the CAA (UK Civil Aviation Authority) and the BAA foisted upon us,” O’Leary remarked.

While most people in the UK aviation industry and politics acknowledge that the appointment and schedules of the Airport Commission are designed to delay a final decision on UK southeast airport capacity until after the next national election, there is also widespread confidence that the work it is doing is both rigorous and independent. Walsh described the Commission’s studies so far as being “the most comprehensive ever undertaken on UK airport capacity”, and Davies has been careful to consult and gain support from all three of the UK’s main political parties.

There is, therefore, a belief that the new government in 2015 will act on the Commission’s conclusions, a belief voiced by Darren Caplan, CEO of the AOA. “It would be extraordinary if the very first thing that the new prime minister of the day does is have a huge decision to make about this and then flunks it,” he said. “So I’m positive about the fact that there will be more capacity in the UK in the years ahead.”

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