IoD Big Picture

Quarter 3 2011

Why London needs a new hub airport

Why London needs a new hub airport

Boris Johnson and Transport for London present the business case for a new hub airport in the capital.

SNAPSHOT
According to the Governments latest aviation forecasts, Londons airports will be full by 2030. While several new terminals have opened in the last 20 years, the only new runway in London since 1970 has been the short strip at London City.

FOREWORD BY BORIS JOHNSON, THE MAYOR OF LONDON

Even before I became Mayor of London, it was clear to me that expanding Heathrow was not the solution to the capitals pressing need for increased aviation capacity. A constrained site too close to thousands of homes was never going to provide us with the full-service, round-the clock, multiple-runway hub airport that so many of our neighbours and competitors now boast. So I welcomed the Governments decision to take the third runway at Heathrow off the table. But saying no to a bad idea does not excuse us from working to come up with the right ideas. London and the country at large depends on aviation for business success and demand for air travel is set to grow. That is why I published a paper in January this year calling for a new hub airport to serve London. It was widely welcomed by businesses and has I think helped to move the debate forward nationally. The article below from Transport for London takes these arguments further. It will inform the response I shall be making shortly to the Governments consultation on the Scoping Document for its proposed Sustainable Aviation Framework (to which I urge all Institute of Directors members to respond, however briefly, with their views on the importance of aviation to the health of the economy). It develops the arguments put forward in my January paper and provides solid evidence of how we are in danger of losing out to our competitors, becoming merely a local station on a branch line connected to one of the major airports on the other side of the English Channel. We cannot allow that to happen if we wish to see international businesses continue to invest in London. The case is urgent. I hope you find the argument persuasive.

Londons international economy depends on access to a comprehensive global network of flights. This in turn relies on a fullyfunctioning hub airport. Without it, crucial long-haul business destinations may be under-served or not served at all.

Heathrow is operating at 98% of its available capacity. This is jeopardising its effectiveness as a hub airport. A number of longhaul routes have been lost in recent years, and UK domestic routes have also suffered.

An alternative to Heathrow must be sought to ensure that the UK has a fully-functioning hub airport to maximise the economic benefits associated with Londons status as a global city.

The issue is urgent. If we fail to respond, the UK risks becoming merely a local station on a branch line connected to one of the major competitor airports in Europe.

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LATEST AVIATION FORECASTS
In August the Government published its latest aviation forecasts. Under its current policy of not increasing runway capacity in the south east of England, Londons airports will be full by 2030. Growth in demand will not simply cease in London at this point. According to its central forecast, the Government envisages that nationwide by 2050 tens of millions of people every year will simply be deterred from flying, while 42 million are expected to travel from London and the south east to less congested airports in other UK regions, such as Manchester. This should alert the Government to a looming and potentially disastrous problem. Londons highly international and productive economy is uniquely dependent on access to a comprehensive global network of direct and frequent flights. This network can only be supported if there is a well functioning hub airport. Without such a hub, crucial long-haul business destinations may be underserved or even not served at all. Yet London will need first-class global aviation connections more in the coming decades than ever before. Moreover, through excellent new links Londons global aviation network should be able to offer other UK regions opportunities for developing much stronger, more globally competitive economies themselves.

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THE UKS ECONOMIC CHALLENGES

The economic challenges now facing the UK are perhaps more formidable than at any other time since the 1940s. The financial crisis and subsequent recession have revealed fundamental weaknesses which demand radical action. The policies which the Government is pursuing to tackle the fiscal deficit are a vital part of this. However, a sustained and sustainable recovery is also going to need bold investment to generate far more jobs and improved export performance. It is essential to consider the international circumstances in which the UK economy will be competing in the future. Over the course of the next forty years or so, a much higher proportion of the worlds population can be expected to be participating in the global economy. This means that the UK will be competing in an increasingly tough, fast-changing world both for resources and for markets. One of the strengths on which the UK must build over the coming years is Londons status as one of a small handful of truly global cities. We also need to move from a position in which London generates wealth to support other regions to one in which the UKs regions participate more fully in the wealth creation opportunities which London offers, including its global connections.

THE IMPORTANCE OF LONDONS AVIATION LINKS

London has become a global city for a number of geographical, historical and cultural reasons but, above all, it has relied on first class global

Why London needs a new hub airport

communications. In particular, in the decades after the Second World War London built an international network of aviation links of unparalleled quality which allowed it to act as a world hub through which passengers from all corners of the globe were funnelled and connected. This has provided huge benefits, from income and work in the aviation sector itself (around one job per thousand annual passengers at airports), its supply chain and the induced demand from this, to competition and productivity benefits in the wider economy. Above all however, the effect of aviation over time has been to transform the character and nature of Londons economy, enabling it to generate far more wealth than it otherwise would have been able to do. For people and businesses based in London, direct flights were available to more places and at greater frequencies than competing cities could offer. Businesses which were heavily dependent on aviation were consequently attracted to London and became increasingly concentrated there, most notably in the financial and business services sectors. This fed demand for aviation and created a virtuous circle of both aviation usage and economic linkages between the UK and the rest of the world, as shown in the diagram below.

CHART 1 Virtuous circle between aviation links and the wider economy

Demand for passenger travel and freight

London and the UKs economy

Supply of air transport infrastructure

Worldwide economy

Air transport flows

Additional enabled flows

Source: based on Mariya A. Ishutkina & R. John Hansman, Analysis of the interaction between air transportation and economic activity: a worldwide perspective, MIT International Center for Air Transportation, March 2009.

Over time, Londons economy has evolved to be increasingly aviation intensive and this has benefited London and the UK enormously. Business travel brings a whole range of economic benefits, boosting productivity and profits for the firms involved. For example, it enables collaboration within multi-national firms, which in turn produces social network effects and improvements in firm performance and productivity. It also helps attract capital flows from overseas. It is estimated that foreign direct investment contributes more than 52 billion each year to Londons economy.

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REASONS FOR FLYING AND REGIONAL VARIATIONS

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People do not generally fly for flyings sake, but rather as a means to an end. Airport demand therefore arises from the demand generated by activities which rely on aviation, both personal and business. These include holidays, visits to see friends and relatives, study visits, conferences, company business in overseas offices, client meetings, overseas employment, to receive healthcare and also for serving goods markets and their supply chains although much cargo is price-sensitive, it is regularly carried on passenger services, particularly where speed adds value. There is regional variation in the nature of the demand for aviation, reflecting the different economic role it plays in various regions. In London, a higher proportion of the market travels for business purposes, a result of the peculiar aviation intensity of its economy. As Chart 2 shows, while the total volume of trips handled at the London airports is about twice as high as the total handled at the main regional airports, the volume of business trips is approximately three times as high. There are also higher volumes of trips to visit friends and relatives (VFR) from London airports because of the higher proportion of Londons population with overseas family and social ties than in other regions. Just over a third of leisure trips at the London airports are for this purpose, which compares to just over a quarter of trips at the main regional airports.

CHART 2 Share of business, VFR and other leisure trips at the London and main regional airports
160,000,000 140,000,000

Total annual passengers

120,000,000 100,000,000 80,000,000 60,000,000 40,000,000 20,000,000

London Airports
Business
VFR Other leisure

Regional Airports*
*13 of the UKs main regional airports

Source: CAA, Passenger Survey Report, 2007/8, 2008, 2009. (The regional airports sample represents approximately three-quarters of total regional demand.)

Also, whereas outbound tourists dominate regional airport usage, there is more balance between inbound and outbound tourists in London. While many tourists visit a variety of UK regions, they typically see Heathrow and London as the gateway to the UK (and to Europe in some cases). As Chart 3 illustrates, while the number of passengers handled at the London airports is less than double the number handled at the main regional airports, the London airports handle almost four times as many inbound tourists as the main regional airports.

Why London needs a new hub airport

CHART 3 Share of inbound tourists at London airports and the main regional airports
120,000,000 23% of passengers arriving at Londons airports are inbound tourists 11% of passengers arriving at UK regional airports are inbound tourists

Total annual passengers

100,000,000 80,000,000 60,000,000 40,000,000 20,000,000

London Airports
Inbound tourists Other

Regional Airports*
*13 of the UKs main regional airports

Source: CAA, Passenger Survey Report, 2007/08, 2008, 2009. (The regional airports sample represents approximately three-quarters of total regional demand.)

CURRENT AVIATION PROVISION AND PERFORMANCE IN LONDON

Today, Londons five principal airports together accommodate 60% of UK demand. Heathrow is not only the largest but is also the UKs only hub airport, while Gatwick, Stansted, Luton and London City airports focus on providing point-to-point services, like every other UK airport. Heathrow therefore plays a special role. Its hub status has a major influence on the services it offers. Heathrow accommodates approximately 35% of all passengers using UK airports to travel overseas and 70% of those travelling outside Europe. Approximately a third of Heathrows passengers transfers between flights, allowing a far broader range of long-haul

CHART 4 Annual passengers at Londons five principal airports, by origin/destination

70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000

Heathrow

Gatwick
Domestic

Stansted
Europe

Luton

London City

Rest of the world

Source: CAA, Annual UK Airport Statistics, 2010.

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destinations to be served directly, as well as at higher frequencies than could otherwise be offered. This is reflected in the distribution of destinations served, as shown in Chart 4. The global reach of Heathrows direct services is very valuable for London as a business location. Business travellers place a premium on the flexibility of high frequency flights and the convenience of direct ones. Although London probably generates more international business passengers than any other city in the world, the demand they generate alone could not justify the levels of service upon which they depend. These services depend to some extent on consolidated demand from leisure passengers, including those originating elsewhere and transferring. For many flights, long-haul in particular, the economics are such that passengers in both economy and business seats are required, together with highvalue goods in the belly-hold. This is explained further in Box 1.

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BOX 1 Why business needs could be under-served without a hub airport

Access to a network of direct long-haul destinations is important for some businesses and they tend to cluster in the relatively small number of cities that can offer it. However, even a city like London could not justify a network of frequent flights to a wide range of long-haul destinations on the basis of business demand alone. In fact, airlines rely on the additional revenue provided by leisure passengers (and cargo) to make viable the network of routes which suits international businesses, with adequate frequencies. The importance of this is demonstrated by the fact that in 2010 there were 39 routes at Heathrow on which more than 50% of passengers were transferring, and a further 92 routes on which more than 25% of passengers were transferring. This works because leisure passengers are more willing to fly indirectly than business passengers, particularly since airlines price indirect flights more attractively. Leisure demand for long-haul destinations can therefore be consolidated at hub airports like Heathrow. In economic terms this means that leisure passengers are effectively generating positive externalities to other passengers, including business passengers, which help correct the market failure associated with the high fixed costs of operating direct long distance air services.

Whilst in the past Heathrows aviation offer has grown alongside growth in passengers, in the past 15 years or so capacity constraints have begun to bite and the development of services has been unable to keep pace. While several new terminals have opened at Londons airports in the last 20 years, the only new runway since 1970 has been the very short strip at London City, as shown in Chart 5. As a result, Londons airports are becoming full. Heathrow in particular is operating at 98% of its available capacity. This causes peak-time delays and poor resilience at times of disruption. At busy times, incoming aircraft spend between 30 and 40 minutes in stacks circling London. In the last ten years, flight sector times between Amsterdam and Heathrow have increased by 30 minutes to 90 minutes to account for this. Pre-departure delays and taxi times are also much higher than at other major European airports. Not only do these problems detract from the quality of the experience of using Heathrow, they also worsen the environmental impacts of Heathrows flights. Furthermore, Heathrows capacity constraints are jeopardising

Why London needs a new hub airport

CHART 5 Historic growth in Londons aviation provision

Source: Mayor of London, A New Airport for London, January 2011.

its effectiveness as a hub airport. The development of new services has generally come at the expense of others, as shown in Chart 6.

CHART 6 Changes in destinations served by Heathrow, 2002-2011

New destinations Increase in service to destination Decrease in service to destination Destinations lost

Source: OAG, 2002 & 2011.

Aside from the loss of a number of thinner long-haul routes from Heathrow1 in recent years, UK domestic routes in particular have suffered. Whereas there were 22 routes between Heathrow and other UK destinations in 1990, there are now six. Passengers departing from UK regional airports do not, however, generally use the other London airports to transfer to long-haul flights. Spare capacity at Gatwick, Stansted and Luton, largely at inconvenient and unattractive times of day, is being overlooked, while regional passengers now routinely use overseas hubs such as Amsterdam Schiphol, Paris Charles de Gaulle and Dubai to transfer to longhaul flights not directly available from their home airport.
1

Jakarta, Osaka, Caracas and Bogota have disappeared from Heathrows departure boards. Lima, Guangzhou, Manila and Panama City have never been available. All are offered at Amsterdam Schiphol, Paris Charles de Gaulle, and Frankfurt.

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Not only does this diminish the feeder traffic available at Heathrow, it also means there is less international connectivity available to the UK regions, since frequencies to these alternative hubs cannot generally be as good as to Heathrow. Meanwhile, while the development of services at Heathrow has been suppressed by its capacity constraints, services from these overseas hub airports have grown. Heathrow has lost its pre-eminence.

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TABLE 1 Capabilities and capacities of the main European hub airports

Airport Runways Current Planned future Current runway Destinations utilisation4 maximum maximum served, as of coordinated 2 coordinated June 20115 flights per hour flights per hour3
876 110 114 83 98 87 120 120 (2015) 126 (2015) 120 98.5%7 70% 73.5% 74.5% n/k 192 277 257 291 191

Heathrow Amsterdam Paris Frankfurt Madrid

2 6 4 3
8

THE UKS FUTURE AVIATION NEEDS

The wealth and opportunities that globalisation offers are rapidly spreading to new regions around the world. National income has been growing at unprecedented rates in many countries, including

CHART 7 The relationship between GDP growth and aviation use

GDP Percent change 7.5 5 2.5 0 -2.5 1970 RPKs Percent change 15 10 5 0
World GDP Gross domestic product World RPKs Revenue passengerkilometres

1980

1990

2000

2010

-5

Source: Boeing, Current Market Outlook 2011-2030, 2011.

2 3 4 5 6 7 8

Data obtained from airport operator websites and European Commission, Impact assessment of revisions to Regulation 95/93. Final Report. March 2011. Ibid. Ibid., unless otherwise indicated. OAG data, June 2011. Destinations include charter flights and flights which make more than one stop. Source: Airport Coordination Limited, Heathrow Summer 2011 Start of Season schedule, 2011. (Comprises 45 departures, 42 arrivals.) Source: BAA, 2007. Frankfurt is due to open a fourth runway in October 2011.

Why London needs a new hub airport

China and India. Historical evidence indicates that there is a very strong link between growth in GDP per capita and aviation usage, as shown in Chart 7. In fact it appears that there is a particularly strong relationship between the number of households with income in excess of $20,000 and aviation usage. Emerging megacities are expected to be the locus of a disproportionate volume of aviation as their future income levels rise, taking increasing proportions of their populations above this critical level. These cities will be heavily concentrated in Asia and Latin America, as shown in Chart 8. In contrast, the current distribution of flights available from Heathrow is weighted heavily towards North America and Western Europe, which account for nearly three-quarters of total weekly flights.

CHART 8 Megacities 2010-2025

2010 2025

Total GDP from 2010

New by total GDP

GDP growth

Source: McKinsey Global Institute, Urban world: mapping the economic power of cities, 2011.

Heathrow no longer has enough spare capacity to respond to market opportunities and, as a result, new direct services are often established more quickly at competitor airports. This may have wider economic consequences for the UK, particularly in the case of important emerging economies such as China. In particular, when there are very high opportunity costs associated with landing slots, as is the case at Heathrow, there is little incentive for airlines to take risks with new and untested routes. In the case of China, European rivals have been better placed to establish new routes and gain first mover advantage, as shown in Chart 9. Londons relative backwardness in developing links to mainland China is also reflected in the comparison between the number of weekly scheduled seats available from Heathrow to mainland Chinese destinations and the numbers available from its continental rivals, as shown in Table 2.

ENVIRONMENTAL LIMITS TO AVIATION GROWTH

The UK should continue to be at the forefront of efforts to make aviation more sustainable but without shackling its economic

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CHART 9 Non-stop passenger flights to mainland Chinese airports from major European hub airports per week

Source: OAG flight schedules for the week commencing 20 June 2011.

potential. The Governments Committee on Climate Change9 has demonstrated that there is still considerable aviation passenger growth permissible within climate change targets, although it is clear that unconstrained passenger growth cannot be accommodated. Its recommendation to the Government is that the UK is likely to be able to accommodate an additional 130 million passengers per year by 2050.10

TABLE 2 Total scheduled seats per week to mainland Chinese airports from major European hub airports. Week commencing 20 June 2011
London Heathrow
Total seats per week 8,915

Amsterdam Schiphol
11,008

Paris Charles de Gaulle

15,078

Frankfurt

Madrid Barajas
1,250

17,583

Source: OAG flight schedules for the week commencing 20 June 2011.

Given the enormous wider economic benefits associated with Londons hub airport and in particular the need for direct international business connections to be maintained and improved, there is a strong case for prioritising hub airport development. Further, there would be less disbenefit associated
The Committee on Climate Change is an independent body established under the Climate Change Act to advise the Government on emissions targets, and to report to Parliament on progress made in reducing greenhouse gas emissions. 10 Meeting the UK aviation target options for reducing emissions to 2050, Committee on Climate Change, December 2009.
9

Why London needs a new hub airport

with lower growth at airports where direct aviation links are not as essential to the functioning of the economy and which are dominated by outbound short-haul leisure flights. Nevertheless, for many people airports generate a major noise nuisance and aircraft emissions can represent a significant health hazard. More than 250,000 people are significantly affected by noise at Heathrow11 and a quarter of the nitrogen oxide monitoring sites at the airport exceeds the EU limit value, with poor health impacts for some people living near the airport. From a local environmental perspective, further capacity expansion at Heathrow is considered unacceptable.

GROWING HEATHROW IS NOT THE ANSWER

Londons economy is crucially dependent on access to an effective hub airport which can give it the range and frequencies of flights it needs for business purposes. Heathrows performance in this regard is already suffering because of its lack of spare runway capacity and the crowded surface access networks which serve it. Despite current efforts to improve its infrastructure, these issues will remain and the fundamental environmental problems it poses for large numbers of Londoners will remain largely unaddressed. As the demands of a modern world hub airport increase, Heathrows shortcomings will only become more pronounced. Furthermore, even had it been given the go-ahead, the third runway project would not provide the long-term solution which is needed. Even with a third runway, Heathrow would likely be operating at close to capacity again by 2030. Heathrows competitor hubs will continue to expand and would regain their advantage before long. Another solution which has been proposed in the past is for Londons airports to work together as a virtual hub. Unfortunately, since they are on different sides of the city, this is not feasible. No major world city possesses a virtual hub network. BA and BAA did try in the 1990s to create a dual hub at Heathrow and Gatwick, but this failed. Convenience and speed of transfer are vital attributes of an effective hub airport. The worlds most efficient hub airports boast minimum connecting times between arrival and departure of around 30 minutes. This level of service would not be possible for transfers between London airports, even if the challenge of providing a fast, reliable and secure means of transferring goods and baggage between aircraft at different airports could be solved.

A NEW HUB AIRPORT FOR LONDON

It is clear that an alternative to Heathrow must be sought to ensure that London and the UK have a fully functioning hub that can accommodate the projected number of passengers permitted within environmental limits. Such an airport would have to meet the following requirements:
11

This compares to less than 5,000 affected to the same extent (57dB) at both Stansted and Gatwick.

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An efficient, resilient operation which allows rapid recovery from major disruption; Sufficient runway and terminal capacity to support an extensive route network, including a renewed domestic network between London and the UK regions, and the ability to concentrate flights into waves of arrivals and departures; Sustainable, high quality surface access, including connections to both London and the regions, maximising use of public transport and high speed rail use in particular; A high quality experience which not only provides an appropriate gateway to the UK but is also able to create a favourable impression on transferring passengers. Such an airport should allow significantly more flights within the permitted climate change ceiling since it would be much more operationally efficient than Heathrow. By ensuring that London continued to have enough direct flights to an expanding network of globalised cities, it would maximise the enormous economic benefits associated with Londons global city role. By having excellent rail and air connections to the rest of the country it could also be a true UK hub airport. It would spread the benefits of Londons global links across the whole country and help people and businesses across the UK forge new business links to build a strong, competitive and inclusive British economy. The Mayor will continue to work on building a new consensus about the need for such an airport and will in due course be publishing further reports which examine the feasibility of various options.

Why London needs a new hub airport