What price European connectivity?

posted on 11th June 2018

Chris Cain and Tristan Crawford, from Oriens Advisors, argue that joined-up thinking on airport capacity is needed if Europe is to get back on its feet economically

The current headlines in the aviation community in Europe concern the threat of a trade war over the EU’s inclusion of air transport in its Emissions Trading Scheme (ETS) on climate change grounds, and taxation of air transport as a means of raising revenues and tackling government deficits. Yet an ever-present debate behind these hot issues is the looming shortage of airport capacity. In an ever more globalised economy, where connectivity to the fastest growing markets is seen as fundamentally important to future competitiveness, congestion at Europe’s airports could significantly constrain long-term growth.

Perhaps the most pressing example of this problem is in the south-east of the UK, where London faces the prospect of being unable to meet a growing demand for flights to emerging economies. Frankfurt, Paris and Amsterdam, each with between three and five runways, look better placed to serve this requirement. A period of inertia in UK aviation policy is not helping. The economic downturn has coincided with the intervention of the courts to delay implementation of the UK’s 2003 Air Transport White Paper. The election of the new coalition government in 2010, with its high-profile “no new runways” pronouncement, has deepened the sense of a policy vacuum.

Various proposals to address a future capacity crisis have met with apparently contradictory statements over the direction the government may take. The industry is still awaiting the release of a new “sustainable aviation framework” (originally planned for the end of March but now delayed until June) to replace the 2003 document.

Whatever long-term policy ultimately emerges, there will be no new runway capacity in south-east England for at least 8-10 years. This puts an emphasis on maximising the use of existing capacity, not only at Heathrow and Gatwick, but also at other tier 1 and 2 airports in the London system – including currently under-utilised commercial facilities such as Southampton, Southend and Manston and specialist business aviation airports such as Biggin Hill and Farnborough. However, Oxford Economics – admittedly in work commissioned by the British Airports Authority – predicts that by 2021 the UK will lose around €10.2bn in GDP and over 140,000 jobs as a result of the inability of London Heathrow alone to increase aircraft movements in line with demand.

Successive UK governments have proved unwilling to expend the political capital required to push through the development of the runway capacity London needs to remain competitive on the world stage. It is 30 years since the region’s last runway was built at Stansted. The efforts of London mayor Boris Johnson, the city’s business community and the aviation industry to move the issue higher up the political agenda have so far been in vain.

Even the airports serving the UK’s near neighbours will run short of runway capacity in 10-15 years, with Amsterdam Schiphol and Frankfurt in particular facing legal and environmental challenges. The long-term capacity position in Europe looks increasingly problematic at a time when competitor economies elsewhere are investing heavily in their airport infrastructure. Prompted by fears for Europe’s economic recovery, the European Union commissioned a study by Steer Davies Gleave in late 2011 to help amend Regulation 95/93, governing allocation of slots, to help open up aviation capacity.

The Draft Regulation that has emerged suggests that more control will be granted to an EU-level committee that could intervene at airport and state level to improve slot utilisation and adopt a market mechanism to withdraw historical slots and auction them off.

A rival study carried out by Mott Macdonald for the European Regions Airline Association (ERA) and the European Business Aviation Association (EBAA) argues that the EU proposals take no account of the overall impact of revising current slot regulation. It puts the likely increase in the number of passengers flying through all coordinated airports at just 2%, equivalent to one year’s normal annual growth. This could create 75,000 jobs, but with a net economic impact that is impossible to quantify. Mott Macdonald says the EU openly accepts that its proposals do not factor in the effect on regional and business aviation services of replacing certain flights with others that make “more economically efficient use of scarce capacity”.

In short, the ERA/EBAA study warns that in return for a modest increase in capacity, slots will be opened up to the highest (probably non-EU) bidder, with the consequence that regional and business aviation connectivity across the EU will decrease and local economies will suffer.

The data suggests this is already happening. According to Airports Council International, airport traffic grew more slowly inside the EU than outside in 2011, at 6.3% compared with 12.2%, and capacity share is being lost to non-EU operators. NATS figures appear to confirm the trend, showing that flights departing from western European regional airports fell by more than 11% between 2002 and 2011, while flights to by non-EU airlines to non-EU destinations rose by more than 60%.

Stagnant regional economies, increasing fuel prices and additional regulatory burdens such as ETS and some countries’ passenger taxes are already eroding regional and shorthaul operating margins, a situation that is likely to worsen if the European Directorate-General for Mobility and Transport (DG MOVE) withdraws slots from airlines randomly and sells them off to the highest bidder, imposes slot reservation fees and closes down grandfather rights to slots for regional or business aviation operations.

Regional air services from congested hub airports do not create the commercial value of most longhaul slots, but serve to underpin thousands of jobs associated with economic sectors located away from core markets (for example the energy and tourism sectors in the UK). Relying on “allocative efficiency” as the driver of capacity, rather than connectivity, excludes regional services that cannot pay the market rate for slots at key hubs. SMEs could potentially lose the connection to their customers and suppliers in the wider world.

A large part of business aviation’s raison d’être is that it enables business-critical employees to access, establish and support inward investment into less accessible or deprived regions, which ultimately may lead to the development of scheduled commercial services.

Figures from Pricewaterhouse Coopers (PwC) indicate that with a total of some 9.5 million flights within the EU, business aviation brought a total of €19.7bn in annual gross value added to the European economy in 2007, accounting for approximately 0.2% of the combined GDP of the EU countries plus Norway and Switzerland. The induced impact, at €9.3bn, was the largest contributor to the economic impact of the sector. Considering business aviation’s direct, indirect and induced impact, this section of the aviation industry alone accounted for more than 164,000 jobs across the continent and generated combined annual salaries of around €5.7bn.

Critics will claim that the underlying economy has far more influence than narrow issues such as slot availability when determining the benefits of business aviation. The counter-argument is that business aviation is usually the first part of the industry to recover following a downturn, due to its role in providing first-mover advantage for investors seeking access to new opportunities and exposure to growth sectors.

PwC says that following the 2008 downturn, business aviation was the strongest aviation market in the EU, with growth at 5.5% in 2010. Aviation as a whole grew by 0.8% in 2009. Business aviation flights in 2011 totalled 658,000 across Europe, up 4.7% on the previous year. One factor is “super-connectivity”: the EBAA says business aviation serves three times more city pairs than commercial aviation.

Europe needs, arguably more than ever, to maintain the capacity, capability and investment activity required to meet the demands of faster growing economies elsewhere. What it does not need is ill-conceived regulatory interference that simply benefits non-EU interests, and which specifically penalises regional and business aviation relative to other sectors.

Ultimately, the ability of the EU’s member states to sell their knowledge, lifestyle, products and services to the wider world is one of the priorities for getting Europe back on its feet again and creating a more balanced and resilient long-term economic future. Commercial, regional and business aviation can all combine to help achieve that common objective if they are given the freedom to do so.