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Date: 6 July 2015

The Airline Industry Perspective on the UK Airports Commission Report

Third runway. Second runway. No runway. What a relief it is to have some clarity at last. Sir Howard Davies and his Commission have delivered an unequivocal conclusion that only a third runway at Heathrow will deliver “significantly enhanced connectivity and substantial long-term economic and strategic benefits for the UK as a whole.”

IATA supports expansion at Heathrow. Let me be absolutely clear about that. But let me be equally clear that we have some serious reservations about the conditions that are attached to this conclusion.

Having laid down that marker, my next comment is on the urgency to move forward. The Prime Minister should indicate publicly that he backs the report’s conclusions, and the Department for Transport should proceed with expediting the next steps. As John Cridland of the Confederation of British Industry put it: “We need diggers in the ground by 2020”.

In parallel, I am fully confident that with the direction clear—to expand capacity at Heathrow—we can now engage in a purposeful dialogue that will lead to acceptable results on the important issues of costs and managing the environmental impact.  There is common ground. The aviation industry is committed to environmental sustainability. And we can only deliver the promised economic and social benefits of a third runway if using it makes business sense to airlines.

Again, let me be clear, a third runway at Heathrow is the right decision. We understand and appreciate the environmental concerns which are discussed thoroughly in the Airport Commission’s report, and questions remain on how it will be funded. But there are abundant global standards and best practices that can guide us towards the outcome of an environmentally sustainable and financially viable critical piece of infrastructure to serve the UK’s connectivity needs.

The environment

Let me address each of these issues, but with one important caveat. The report is just out and we are still studying all of its implications – and those contained in the many detailed supporting documents. So I will keep my comments at a high level. Going tit for tat on the detail will not get us anywhere at this stage. But there is a valuable discussion to be had about achieving the desired outcomes—the important results we all want—without being bound to the prescriptive measures in the report, which may not be the most effective means to an end.

Let’s start with the environmental challenge—one which I am confident will be solved. Aviation has a proven track-record of success in reducing noise and CO2 emissions per passenger by 70% compared to the first generation of jet planes. The industry already has the most comprehensive global carbon reduction targets and strategy of any business sector, which includes:

  • Carbon-neutral growth from 2020, and
  • Cutting CO2 emissions in half by 2050 compared to 2005.

It is a longstanding tenet of world climate-change agreements that emissions from international aviation and shipping are not within the scope of national carbon-reduction strategies. Aviation is a global industry and responsibility for international aviation emissions reductions is handled by ICAO. The UK need not fear that its modest expansion plans for aviation bring it into conflict with its carbon goals: the industry’s own targets and the firm approach of successive British governments at ICAO have helped to bring an international agreement close to fruition. The aim now is to agree a global market-based measure for aviation emissions at the next ICAO Assembly, in 2016, and to have it in place by 2020, making the industry’s future growth carbon-neutral long before any new runway will be built.

Aircraft noise is a separate issue, and a particularly important one at Heathrow. We recognize that noise impacts must be mitigated. But Heathrow is not the only airport facing this challenge. And for many years now, the ICAO Balanced Approach has been the globally-agreed method for tackling noise issues. Where properly implemented, it is very effective. The Balanced Approach encompasses reduction of noise at source, land-use planning and management, noise abatement operational procedures, and, only as a last resort, operating restrictions on aircraft. Experience at other airports shows us that, with this approach, it is possible to operate flights in such a way as to achieve a balance between connectivity and good community relations.

While the Final Report uses the expression “Balanced Approach” to describe its accompanying measures, some of its proposals are disproportionate. A major concern is with the combination of a new GBP1 billion community compensation fund and a new aviation noise levy. The Commission argues that the compensation fund will be paid by HAL Ltd, while the new aviation noise levy will be paid by airport users. But the truth of the matter is that the GBP1 billion would also be paid by users. So airlines will end up paying over and over.

Quite frankly it is putting the cart before the horse. The airport, the airlines and the local community need to agree on the desired outcomes first and then agree what measures are needed to achieve them and at what cost. I am under no illusions that this will be an easy course. But by using a similar process—consistent with the balanced approach—community support for a second runway at Tokyo’s Narita airport was achieved even after a long and bitter history of disagreement.

A similar approach should be applied to the proposed ban on night flights between 11.30pm and 6am. The Final Report says that this restriction is outweighed by the increase in capacity, but even so, admits that this will weaken Heathrow’s attractiveness as a hub. The restriction is an overly prescriptive solution when other, better, options—possibly with operational measures—may exist.

The balanced approach is also important for reminding us of the importance of land-use planning. The Commission recommends that a noise envelope be set to limit the level of noise and suggests that the total number of people affected by noise be capped at today’s levels.  If that were to happen, planning authorities would have to take responsibility to prevent new housing from being built in areas exposed to aircraft noise. Otherwise, as new, quieter aircraft come into service it will be a case of one step forward, two steps back. 

The other important environmental issue is local air pollution. Technical developments have allowed us to reduce unit emissions of Oxides of Nitrogen that affect local air quality by 40% over the last 35 years. The airport is confident it can meet European targets. And to those who say it is impossible, I say this: it is not a credible position to block a runway today, on the assumption that no possible solution will be available to mitigate these issues tomorrow.

Financing

Now let’s look at how the infrastructure can be funded. It is encouraging to read the convincing case Sir Howard and his colleagues have made for choosing Heathrow and their optimism on its financial success. I’m an optimist too, but financial success is not guaranteed. The issue is not whether it is possible to squeeze more money out of the consumer. For an airport with strong market power that’s not the way to measure success.
The first point to make is that a strong regulatory framework is needed. And to protect the UK’s competitiveness, it needs to be focused on efficiency and consumer benefit.  A key component must be a close scrutiny of all costs associated with the new capacity, and how these are allocated to different stakeholders. That’s my first marker.

And I need to lay down another strong marker that pre-funding the construction is not an acceptable option for airlines. Again, ICAO sets out the principles and conditions under which pre-funding is acceptable, and it is hard to argue that this project qualifies. 
But even if you put aside globally-agreed standards and principles, there are some very powerful practical reasons why pre-funding is a bad idea. First, would any of you in this room be willing to pay tolls for a road or bridge that is not yet built? I think not. So why should users of Heathrow today be paying for infrastructure that will only be available several years from now?

From the airline’s point of view, it is even more egregious. Pre-funding would mean that airlines serving Heathrow today would foot the bill for new competitors to come into the market. In what other industry would something like that even be considered?
It’s not as though airlines can afford to absorb any further costs – as the Commission rather glibly assumes. According to IATA’s latest forecast, 2015 will be the most profitable year in the airline industry’s 100 year history.  But it’s not much to celebrate when the average profit margin is about 4% - or just over $8 per passenger. 

At this point, I think that we need to dispel a myth that Heathrow is some sort of pot of gold for airlines. The two biggest players at Heathrow—IAG and Virgin Atlantic—are not making their cost of capital. And British Midland, for many years a big Heathrow player, has disappeared. And let’s not forget that the airlines have their own businesses to invest in—upgrading fleets and products. They also compete vigorously in order to win customers by delivering great value. Over the last two decades average fares have dropped by some 64% even as airlines have invested hugely in new fleets and enhanced products and service – while airport charges, by  the way, have greatly outpaced inflation.

There is no room in this very tight business model to pay for something that will only be delivered at some point in the future.

While, in the strongest terms, I am putting forth the industry’s position against pre-funding, I must emphasize that airlines do accept the user pays principle. But that can only start when there is something to use! Building a runway is a sound investment for which financing should be readily available. And as long as charges are kept competitive, the increased traffic volumes will provide a steady income stream for repayment in a manner that is fair to all concerned.

Political will

Finally, I would like to touch on the issue of political will. The UK’s policy record on supporting aviation is not encouraging. Let us not forget that Air Passenger Duty—the highest aviation tax in the world—is still with us. It would be great to see the government commit to abolishing this tax on connectivity at the same time as committing to implementing the Airport Commission’s recommendation. But perhaps that would be expecting too much!  Certainly, there’s no doubt that seeing this project through successfully is going to take a lot of political commitment. That’s true of any big and controversial project. But look at the 2012 Olympics. The naysayers were proved wrong on that, and will be proved wrong again on airport expansion.

Some of the opposition is implacably against any expansion. But their position is irreconcilable with the majority view that connectivity is a good thing, and the opportunity to travel by air should be available to all.

Other opponents don’t want to see Heathrow grow, but prefer alternatives like Gatwick, Manchester, Birmingham, or a completely new-build airport in the Thames estuary. The media delights in seizing on these differences of opinion, but in reality these voices share much in common. They all fundamentally agree that air connectivity is valuable. They all agree that new capacity is needed. And they all agree that the environmental impacts of building a new runway in their preferred location can be mitigated.

When we put these shared values alongside the unions, businesses, politicians, passenger groups and others who support the need for greater air connectivity, the political “unviability” of airport expansion no longer seems so inevitable. 

If we set aside the emotion and the political arithmetic around the various expansion choices, it simply becomes an issue of looking at the cost/benefit analysis and judging which options offer the greatest advantage to Britain as a whole. This is what Sir Howard and his team have done so well. They have taken a long-term view and recognized that this is not about the situation today or in five years’ time. This is about equipping the UK to service demand for the next 50 years.

IATA’s crystal ball does not go out that far, but it does look out to 2034. Here is an important fact: the number of air travelers is set to more than double in that time. By 2034 some 7.3 billion passengers will fly each year. And a great many of those travelers will want to come to Europe. Britain needs to decide if it wants to benefit from the jobs and economic development these travelers will bring, or whether it is happy to see these benefits snapped up by France, Germany, the Netherlands, or other hubs in the Gulf and elsewhere.

Sir Howard and his Airports Commission have performed a valuable service to Britain in completing such a thorough and decisive report. But it would be politically naïve to presume that the case has been won. The opponents of expansion at Heathrow are as vocal as ever. To win this debate, we must mobilize the silent majority in the UK who want Britain to remain an open, competitive and connected economy. In the end, the decision for a new runway in the South East of England is far more than simply a decision on where to place some tarmac and a terminal. It is not about the opinions of a handful of cabinet ministers and a vocal number of their constituents close to Heathrow. It is about the future of Britain as a nation that sees itself as a vigorous global center of business and culture.

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