London’s airport expansion plans must consider scale and competition

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Everyone who has suffered delay in taking off or landing at London Heathrow Airport will have been interested in last week’s report from the independent Airport Commission. The commission was appointed by the UK coalition government to delay a decision on expansion of London’s airport capacity until after the 2015 general election. And there will be plenty time to contemplate the issues as your plane circles the capital. Whatever solution is agreed, it will not be operative for at least 10 years.

The commission has rejected grand visionary schemes, such as “Boris Island” – a new airport in the Thames Estuary favoured by Boris Johnson, London’s populist mayor. Given the history, they were right. It is almost 50 years since a plan for a new airport northwest of London, with room to accommodate future traffic growth, was put forward. With hindsight, Cublington should have been built. But that plan was superseded by an even more grandiose scheme – with the predictable result that nothing at all materialised.

New capacity has instead been created in piecemeal fashion and the question now is what further piecemeal expansion should take place. The commission has shortlisted three proposals. Two involve extensions to Heathrow, the other an expansion of Gatwick, London’s second airport.

Heathrow is the business airport where sharp-suited professionals stride briskly towards the gate. Gatwick is for leisure: beshorted travellers while away the hours before their departure for Málaga. And, although only a 30 minute train ride from the City or West End, Gatwick is almost inaccessible by limousine from central London.

But these images are changing. BAA, which runs Heathrow, was obliged to sell Gatwick, which is now owned by a group of institutional investors. Its management is attempting to compete with Heathrow both for traffic and to be the site of expanded airport capacity.

The key issue is whether the future of civil aviation is “hub and spoke” or “point to point”. In the hub and spoke model, feeder services serve central airports. Memphis and Louisville are among the world’s busiest freight airports for reasons that have everything to do with their location and nothing to do with the business environment of Tennessee and Kentucky. Long-distance travellers are less tolerant of indirect routes than FedEx and UPS parcels, but the world’s busiest airports – Atlanta, London Heathrow and Chicago – are similarly used by many travellers not going to these cities. Hubs are natural monopolies, with large incumbent advantages – the more flights already using it, the more attractive the hub.

Today, Heathrow is losing its number two position in global airport rankings to Beijing and Dubai. London was the prime European hub when planes struggled to cross the Atlantic. But you can now fly nonstop from Los Angeles to Dubai. There you will find a hub for Asia, and a location where you can build a new runway in less than 10 years because there are few locals to object (and it would matter little if they did). The principal drivers of growth in air traffic today are Asian markets and point-to-point services.

Some of these new point-to-point services are operated by low-cost carriers – Ryanair from Edinburgh to Beziers (population 72,000 and famous, though not very famous, for the Feria de Beziers). Others are direct flights to regional centres made possible by smaller but fuel-efficient long-haul planes. A British Airways Boeing 787 flies directly and daily from London to Chengdu (population 15m and a manufacturing hub of southwest China).

The commission must choose between the scale advantages of monopoly and the innovative benefits of competition. Airline history favours the former, experience of other industries supports the latter.

This article was first published in the Financial Times on November 19th, 2014.

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