Heathrow expansion priorities for a post-Brexit UK
Posted: 6 February 2017 | Rafael Schvartzman | IATA Regional Vice President Europe | No comments yet
As the Brexit strategy begins to take shape, IATA’s Regional Vice President, Europe, Rafael Schvartzman looks at the Heathrow expansion decision in light of the result…
As the global trade association for the world’s airlines, IATA has a unique international perspective, which can be valuable when applied to aviation policies at a national level. As the United Kingdom begins the Brexit process, it faces a number of important decisions regarding aviation, not least on future airport capacity. It is important that these decisions are made in full awareness of the global context.
Let’s start with industry profitability.
On one hand, the industry as a whole is making good profits. Our forecast in December is for airlines to make a global profit of $29.8 billion in 2017. This should mean that airlines return the cost of capital for their investors for just the third year in history – a key metric for financial sustainability.
But on the other hand, the breakdown of the profit reveals that more than half – $18.1 billion – is set to be made in North America. In Europe, by contrast, a market of similar size, airlines will make just $5.6 billion. The average EBIT margin in Europe is almost one third of the North American benchmark.
Profitability is the bedrock of a thriving industry. If airlines are not making money, they cannot invest in new routes, new aircraft, or expand employment opportunities. The industry is extremely competitive. This is great for consumers – the cost of an average return fare is down 62% compared to 1995 – but makes it tough for airlines. And these competitive pressures are set to intensify.
Air transport is also vulnerable to economic shocks. That’s why the growing global uncertainty on trade is a significant concern. Aviation can be a great catalyst for economic development. But its impact can only be maximised if it goes hand-in-hand with open markets. Those of us that believe that increased globalisation has been a decisive factor in the economic growth of the past decades have a duty to remind policy-makers that protectionist policies are economically self-defeating. It’s also important that if Governments decide to impose new regulations, they give the industry sufficient notice and consultation to ensure that they are enacted in the most efficient way and with the least disruption to passengers.
The importance of new aviation capacity for the UK
Nowhere is this need for consistency and communication more important than in Britain. Next month, it is expected that the UK will trigger Article 50, and begin the process of leaving the European Union. It is a huge leap in the unknown for Britain and Europe. An entirely new trading relationship needs to be agreed, between the UK and Europe, and between the UK and the wider world. It will be a herculean task, with a number of extremely difficult discussions. And one of the most important will be the future of the aviation industry.
Even in a ‘Hard Brexit’ scenario, the UK is still going to see very significant demand for air transport…
The common European aviation area has been an unquestioned success of European cooperation and regulatory skill. Deregulation has reduced costs and ensured greater choice for passengers. And it has created opportunities for new airlines to emerge. We hope the UK government realises the vital contribution aviation makes to the UK and ensures that finding a new regulatory settlement for airlines is a top priority in the Brexit negotiations.
However, despite the economic risks facing the UK, the projections of IATA’s Economics Team are that even in a ‘Hard Brexit’ scenario, the UK is still going to see very significant demand for air transport in the coming two decades. Passenger numbers will grow by at least 90 million and could be as high as 110 million. In order to meet this expected demand, and fulfil the need to trade more widely with the world following Brexit, the UK urgently needs new airport and airspace capacity. With the key London airports close to full capacity, the case for a new runway in the South East has been widely accepted for many years. But the political debate over the right place to build new infrastructure was so intense, it continually delayed this vital decision.
The end to this uncertainty, thanks to the decision to build a third runway at Heathrow, is very welcome. But the projected cost of £17 billion is much too high. As IATA’s Director General put it in December, for that sort of money, the UK could have built and run the 2012 Olympics twice over.
The estimated £61 billion economic benefit of Heathrow’s expansion will not be realised if the costs of the project remain this high. It is therefore essential that the airport owners, the CAA and the government agree with the airline community on the parameters of an affordable scheme. For airlines, this means no increase to today’s charges. HAL’s charges at Heathrow are already the highest in the world. According to CAA figures, Heathrow charges are over double that of Gatwick, 25% more than Frankfurt, 34% more than Paris CDG and 40% more than Amsterdam. So for Heathrow, it is vital that today’s charge is a ceiling. We are not interested in the concept of “average flat” charges over a period of time.
CAA and Government approach must benefit consumers, communities and airlines
The CAA’s consumer-oriented approach will be crucial to delivering a cost-effective expansion at Heathrow. Affordability and financeability are top of mind, and the CAA is very much aware of airline concerns regarding pre-funding and the industry feedback on the its consultation on planning costs. We remain disappointed with the CAA’s decision regarding the approval of the first £10m of planning costs being incorporated into the Licence. But we trust that the CAA will keep an open mind on the treatment of additional planning costs, which could be as high as £800m. Whilst getting the design right in the planning phase is critical, these figures give us cause for concern and provision will need to be made to ensure proper scrutiny and control of these costs.
The estimated £61 billion economic benefit of Heathrow’s expansion will not be realised if the costs of the project remain this high…
On the positive side, we are encouraged by the CAA’s approach to develop the long term regulatory framework. A thorough analysis of options, including any departures from the current Regulated Asset Base model, must be undertaken. We must all be open to change. But change should follow certain key principles, particularly consistency and certainty, good outcomes for consumers, and a fair deal for airlines.
The Government must also recognise its responsibilities. Last week, the government unveiled a national policy statement, which among other things set out a framework for a ban on Heathrow flights for a six-and-a-half hour period at night. We support an approach to night flights which balances their important connectivity role with a continued reduction in environmental impacts.
But the long-haul connections to Asia that are so vital to Britain’s economic future require slots to be available in the early morning.
Let’s not forget that in today’s globalised market, connections to these cities can easily shift…
It is worth focusing on this point, to understand where the future growth markets are. By 2030, for example, the ASEAN region will have grown by 90 million people. Places like Manila, Jakarta, and Bangkok are becoming super-cities. Second-tier cities in the region, such as Samut Prakan and Batam will more than double in size. One of the major advantages of Heathrow’s expansion is that it offers more opportunities to serve these fast-growing markets. But if the airport is crippled by severe operational restrictions, then this benefit will be lost. Let’s not forget that in today’s globalised market, connections to these cities can easily shift to other airports such as Amsterdam.
Supporting airspace modernisation is also absolutely vital. This needs to be progressed to address the increasing levels of congestion and delays that passengers and airlines face today. Indeed without changes to airspace, there can be no expansion. Chris Grayling’s comments on the importance of airspace modernisation were very welcome. The challenge for the Government now is to promote an efficient and effective airspace change process. However changes proposed by the Government to link airspace compensation to that associated with a new runway give cause for significant concern. The airline industry will support the need for change and IATA is backing the NATS ‘Sky’s the Limit’ campaign.
The delivery of an affordable, effective Heathrow expansion is essential if a post-Brexit UK is to achieve its stated aim to be a competitive business and tourism location. By working with the airport to open the books and focus on a realistic cost proposals, the airline industry can help to play its part in delivering robust and sustainable future air connectivity for the UK.
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About the Author
Rafael Schvartzman is Regional Vice President for Europe in IATA. He leads the activities of the largest region, including building strategic relationships with aviation stakeholders, advocacy for the industry on behalf of IATA’s members, implementation of new products and services, and presiding over the secure transfer of more than $70 billion in the Billing and Settlement Plan and Cargo Accounts Settlement Systems.
Rafael built his career in DHL in the Americas for 10 years and also worked for different air transport companies in South America.
Graduated from the University of the Pacific in Economics, he holds a Master in Positive Leadership and Strategy in collaboration with IE Business School.