Coalition Government full frontal attack on British aviation; Heathrow R3 in jeopardy
14th May, 2010Key Points:
Coalition government vows to cut back on airport expansion, will raise aviation taxes;
Heathrow third runway to be axed;
Lib Dem MPs able to influence aviation policy;
Labour had been more pragmatic on air transport matters;
No regional airports policy exists – regionals look for crumbs, led by Birmingham;
Unfavourable contrast with European mainland and Gulf airports;
More impetus for BA to shift equipment to Madrid;
Olympic dream fades;
Johnson’s Estuary Airport still likely to be rejected;
Coalition committed to ‘high-speed rail’;
Per-plane tax to be introduced – prospects for domestic UK airlines diminish;
Other tax measures will be introduced;
Futurologists get bad vibes.
Five days of horse trading followed the British General Election on 06-May-2010, which ended in a stalemate with no single party having a working majority in the House of Commons. The eventual outcome was a Conservative-Liberal Democrat coalition, announced on 11-May, the first in the UK for 70 years. And the green voice has gained several octaves in the process. The respective parties in this coalition are at opposite ends of the political spectrum and it is not at all clear how long it can last. But so long as it does there will be major challenges for British aviation.
One of the few things the coalition parties seem to agree on is a perceived need to curtail air transport. Indeed, the very first joint policy statement they made was not about Britain’s huge financial deficit and how to reduce it without slashing public sector jobs, hiking taxes massively or harming essential public services; nor was it about immigration, crime, education, the Afghanistan conflict or any of the other matters that the electorate voted on. Instead the priority was an insistence that the third runway project at London’s Heathrow Airport be cancelled – a proposal that had appeared in both parties' manifestos but that had barely been noticed by the public, outside a small area of southeast England. This policy statement alone speaks volumes about the future for air transport in the UK.
To put the matter briefly into some sort of context, the Conservatives have been out of power since 1997, when Labour won a massive majority, since slowly whittled down. The Liberals, who became the Liberal Democrats in 1988 on merging with the Social Democrats, were last in power - again in a coalition government, with the Conservatives (Winston Churchill began political life as a Liberal) - in the Second World War and were last in power in their own right in the 1920s.
While out of power, the normally pragmatic Conservatives have lurched to the centre left, become more touchy-feely and acquired ‘green’ credentials (their logo even changed colour from blue to green). The Liberal Democrats (LDs) have rock solid green credentials and part of the horse trading with the Conservatives was on the adoption of environmental policies such as wind turbines instead of nuclear power stations. The LD’s leader, Nick Clegg, becomes Deputy Prime Minister to David Cameron although that role has been largely symbolic in previous administrations.
It initially seemed as if the roles of Secretaries of State for Transport and for the Environment would have been LDs, but the jobs eventually went to Conservatives. A Liberal Democrat did fill the Energy and Climate Change brief and the LD Treasury Spokesman Vince Cable, popular in the media as a formally educated economist (there are precious few of them in British politics) becomes Business Secretary where he will also be able to influence aviation matters, replacing Labour’s Lord Mandelson, who, despite other shortcomings, at least fought air transport’s corner.
Labour disappears to lick its wounds - leaving some plane dangerous leaders
The Labour Party, which had, ironically, become the pragmatist where air transport was concerned, and which had backed the third Heathrow runway, has disappeared from the scene for at least as long as this coalition government lasts.
Labour is meanwhile in some disarray – the ‘New Labour’ project started by Tony Blair seems to have come to an end. To complicate matters further, the minor parties now represented in Parliament are mainly (regional) nationalists from Scotland, Wales and Northern Ireland, whose primary concern, understandably, is to fight for local interests rather than national (British) ones. And Parliament even has its first ‘wild card’ MP from the Green Party – the affable but strident party leader Caroline Lucas – who can be expected to be extremely vocal on all air transport matters.
It is almost as if pressure group Plane Stupid had managed to have its own candidate installed at Westminster. What chance her getting a minor Cabinet role in the future? If Ms Lucas were to take the Transport portfolio, the grim picture would be complete.
Not only Heathrow, but also Stansted and Gatwick under the gun
While cancellation of the Heathrow runway project grabs the headlines, other measures proposed are of equal concern.
For example, the new government has also agreed to reject the construction of additional runways at London Gatwick and London Stansted airports. The latter, owned and operated by BAA/Ferrovial but still potentially subject to enforced sale, has been involved in public enquiry hearings concerning a second runway, which it considers essential. The former, now owned mainly by Global Infrastructure Partners (GIP), could not have a second runway until 2019 anyway under previous legal agreements, but despite recent announcements by its management that they don’t want one right now, surely they must do for the long term – how else can the world’s busiest single runway operation airport, which seems to have regained some popularity since GIP took it over – expand? And what does this decision do to encourage further investors, as GIP wants, after attracting South Korea Pension Fund and Abu Dhabi Investment Authority?
Birmingham improbably seeks to capitalise at Heathrow’s expense
Naturally, some airport managements have sought to capitalise on these developments - but appear to have overlooked the bigger picture. Birmingham Airport for example “welcomed the new Government’s thinking and fresh approach” and insisted it can “form part of the solution to the ‘Heathrow problem’", as there is spare capacity at Birmingham, which is less than 100 miles north of London, enough to take another nine million passengers immediately. (More distant Manchester Airport, which already has two runways, has been quiet so far). Birmingham’s logical thinking is that in these ‘difficult times’ it makes sense to use and improve existing facilities rather than build new ones. Fine, but Birmingham needs a runway extension for long haul services, which is already being fought tooth and nail locally by organisations like Friends of the Earth – it hopes to have it completed by 2014.
But the airport is not exactly out in the boondocks; there is a large municipal housing estate right next door and the flight paths are over heavily built up areas to the east and south of the city. Even though a village would not have to be destroyed as in the case of Heathrow, a large forested area would. And to the ‘Greens’, who now have huge influence in this government, a tree is as important as a person. In short, Birmingham should not think it will receive any favourable treatment. It is just an airport, and there is no alternative ‘regional airport policy’ in this coalition.
Continental airports to benefit? - Paris CDG, Amsterdam, Frankfurt - and the UAE
So any other regional airport that opportunistically perceives some local advantage out of the Heathrow decision is likely to find itself similarly compromised.
All this contrasts unfavourably with the position on the ‘near Continent’ of the European mainland; those airports that compete with Heathrow and which will help their respective city-regions compete for the financial services companies that will inevitably relocate from London in the wake of new EU legislation – something that had evidently worried previous Prime Minister Brown intently.
The less busy Paris Charles de Gaulle Airport for example already has two pairs of parallel runways (even if their configuration is not ideal). Frankfurt has three runways with a fourth planned, Amsterdam five plus a specialised GA runway with a seventh planned, and Madrid four. There is little point in adding terminal capacity at Heathrow such as T5, the rebuilding of terminals 1 and 2 and the proposed T6 while it struggles to handle aircraft on two runways, operating at 98% capacity for most of the day. A child would understand that.
Moreover, there is an enormous capacity increase in the Middle East, especially at Dubai, Abu Dhabi and Doha, airports that will increasingly become competitors to Heathrow in a growing global village with shrinking, consolidating airlines.
Massive repercussions for British Airways at its home base - migration threat
The Heathrow decision will have repercussions for British Airways, which has all but reached agreement with Iberia to merge, subject to lingering concerns about the precarious financial position of both parties - concerns made worse in the case of BA by the recent and continuing volcanic ash effects, past and promised strike action and an apparent inability to solve its massive pension deficit.
BA CEO Willie Walsh is not the first to threaten to shift BA aircraft and services away from Heathrow, as he did in the build-up to the election as the rejection of R3 became a probability rather than possibility. Lord King, the company’s Chairman in the 1980s, threatened to move BA lock, stock and barrel to Stansted in a dispute over charges and expansion at Heathrow. But while it was always assumed the grizzly old ‘Margaret Thatcher’s favourite businessman’ was bluffing, Walsh almost certainly is not. It is quite possible he will shift equipment to Madrid to augment lucrative Latin American services there - though much will depend on the health of Spain’s ailing economy.
Olympic Games undermined?
Another area of concern must be the 2012 Olympic Games, which will be held in east London at a cost of many billions of pounds – and growing - incurred by the outgoing government.
The R3 decision might be interpreted by the heavily indebted Ferrovial as letting them off the hook concerning terminal enhancements that the previous government pressured them to make in preparation for the Games. The third runway project was very much part of that deal.
In fact, while it is inconceivable this coalition government would scrap the Olympics project, which is more than half completed, it could scale it down, to the detriment of smaller airports like London City (GIP), London Luton (municipal/Abertis), Southend (Stobart Group), Kent International (Infratil) and even Gatwick, all of which have anticipated making large profits from the event.
Thames Estuary Airport unlikely to be attractive to government either
The question of Boris Johnson’s much vaunted ‘Estuary Airport’ to the east of London also now comes into the equation. The eccentric Johnson is the (Conservative) Mayor of London and is tipped as a future leader of the national party, potentially sooner than later if the coalition goes pear-shaped. He has been lobbying for a floating airport in the Thames Estuary for the last two years and at least one minor party adopted it as policy for the election. On paper, it looks as if Johnson has moved a step closer to his dream. He has considerable influence within the Conservative Party; but that overlooks the LDs and their anti-airport policy, which will win the day, at least for now.
So how does the coalition plan to tackle Britain’s ‘congested skies’ and the ‘pollution’ they produce? The Conservatives’ stated aim prior to the election was to make Heathrow ‘better, not bigger’, whatever that means – surely you make it better by adding a runway that alleviates the overcrowding that exists already? The LDs aspired to much the same as part of plans to meet European air quality targets by 2012.
High speed rail is a phantom "solution", at least in the medium term
Instead of air travel, the policy of each party has favoured rail for several years now - not that improving the rail network in Britain by adding a couple of high speed lines will make any significant difference to the world’s busiest international airport, even with a direct connection into Heathrow.
The Conservatives stated they would link Heathrow directly to their ‘high-speed rail network’ which comprises a line from London through the Midlands (possibly to include Birmingham Airport) to the main north west England cities and eventually to Scotland, and possibly another line up the eastern side of the country. The LDs broadly concurred with that. Both parties vaguely aspire to the reopening of sleepy branch lines and stations throughout the country; those that were closed down in the ‘Beeching’ era of the 1960s. But since then the nationalised British Rail has been broken up into what is a partly private structure (the 33 rail operating companies) and the peculiar not-for-profit Network Rail that manages the infrastructure. It is not at all clear who would pay for these lines and stations to be re-opened.
Nor is it clear who would finance the cost of the high-speed rail lines, estimated at up to GBP30 billion, with a construction timeframe of 20 years. On top of that, many environmentalists, growing short of easy aviation targets, are beginning to turn their ire on to rail, which is no longer regarded as being as environmentally clean as it used to be, and especially since it was realised that large tracts of the nation’s most attractive countryside would have to be cut to pieces in order to accommodate the lines.
LDs + PPDs + APDs = ?
As far as these rail proposals go we are in the land of make-believe but this coalition will go ahead with them. Meanwhile, the prospect for Britain’s domestic airlines diminishes. The LDs made clear before the election that they would introduce per-plane-duty (PPD) as an alternative to the already punitive Air Passenger Duty (APD), on the basis that the APD taxes full flights but not empty ones, and that they would charge an additional, higher rate of PPD on domestic flights “if realistic alternative and less polluting travel were available,” with the objective of raising an additional GBP255 million per annum. They would also start to tax airfreight for the first time.
Generally speaking, and despite the very high rate of tax currently charged on air travel in the UK, many people would be prepared to grit their teeth and put up with the higher costs, if the tax were to be channelled back into the community, for example in the form of environment-enhancing measures (on the basis that it is imposed as an environmental levy). But in reality, there is no guarantee that funds raised from the new per flight duty will be used for environmental or infrastructure benefits any more than APD was.
Indeed, the general population knows that it is no more than one of many stealth taxes employed to try to reduce the national deficit - no more, no less. That was the case under Labour and that will be the case now. The LDs made it known before the election that they aimed to raise more than GBP5 billion per annum from the tax, up from the GBP2 billion per annum under the Labour Party’s plans.
British Airways was one of the first airlines to pick up on this issue, insisting that “increased taxation on the UK aviation industry will create a financial incentive for customers to fly via continental hubs rather than direct from or in transit of, UK airports, leading to higher emissions”. (Actually, customers flying via continental hubs might even benefit UK regional airports, that BS has long overlooked – but the bigger picture is that a 'per plane' tax would hurt regional airports and reduce the range of destinations they offer).
But a handful of carriers (not Ryanair, of course, which regards any tax as a curse) perceive some ‘benefits’ from PPD. One of them is easyJet, which welcomed the tax reform and stated it was looking forward to working with the Government to “reform the air tax to make it a greener and fairer tax”. easyJet is an airline that benefits from a comparatively new fleet (mainly the A319). So much so that it’s outgoing CEO was openly criticised this week from within its own Board for lavishing money (GBP2.7 billion) on new aircraft while failing to pay a dividend or improving the share price.
It appears that easyJet’s endorsement of the PPD is based on the carrier's having such a new fleet, when the PPD could be configured to target airlines flying older equipment, as well as a comparatively high load factor compared with many legacy airlines.
If this is to be the case then airlines like Jet2.com, which predominantly operates in northern England and Scotland, outside the orbit of the government, have much to be concerned about. Jet2.com operates a fleet with an average age of over 20 years. It will also be the case that the tax means that the further passengers fly, the more they will pay, as with the APD, but even more draconian, of that we can be assured.
As if all this were not bad enough, the country is faced with an increase in Value Added Tax (VAT) to 20% from the current 17.5% and increases in income tax that have been estimated as possibly up to six percentage points (although LD policy would increase the amount of earnings available before tax kicks in to help the lower paid - and the Conservatives seem prepared suddenly to go along with it).
VAT is currently not chargeable on air tickets or on aviation fuel in the UK. How long will that last? British governments simply love fuel taxes. The UK is one of the few countries in the world where motorists pay tax on tax – VAT is applied to the fuel duty imposed at the pumps.
So the general prognosis, for the reasons mentioned, is not good and the industry faces cancelled infrastructure projects, higher direct and indirect taxes and an all-pervading anti-aviation policy generally.
Futurologists preview the demise of aviation
A gaggle of futurologists, led by the UK-based Rohit Talwar, has even gone so far as to ponder the entire demise of the aviation industry – and not just in the UK. The event that prompted it was what the futurologists like to call a ‘wild card’ – in this instance the Eyjafjallajokull volcano eruption in Iceland, in Apr-2010 that continues to cause disruption to airlines from Greenland to North Africa and all points in between, and upon which CAPA has deliberated since the closure of northern European airspace on 15-Apr.
See related report: Ash Attack shows real value of aviation to global economic and social fabric. More shocks to come
One of their concerns is what would happen if the ash cloud lasted two years, as some people have been warning? A particular focus has been on the potential effects of any longer term disruption on the ability to fly people and goods around the world and what that might mean for the aviation sector and those dependent on it.
The curtailment of air travel has put the focus on to the future of civil aviation. While it remains a crucial part of the transportation infrastructure around the world, the effects of a wildcard such as the ash cloud have bought the challenges it currently faces into starker contrast.
The airline industry globally has debts of over USD200 billion, has only made a profit once in the last ten years and the losses continue to mount. Recent announcements have highlighted first quarter losses for AMR Corp (the parent company of American Airlines) of USD505 million, USD256 million at Delta Airlines and USD140 million for Continental in advance of its merger with United. Under such circumstances, the prospect of a two year stoppage of commercial aviation to Europe has led to some deep debate on the future of the aviation sector.
A viable future for the airline industry needs to be established
Increasingly, people are willing to ask the unthinkable question – does the airline industry have a viable future? While airline executives might baulk at the idea of discussing the topic, the industry does face very tough challenges as it strives to define a long-term future. Alongside issues of financial viability, there are growing concerns about how the industry, globally, can return to profitability while addressing over-capacity, environmental impacts, rising fuel costs, the possibility of emissions-trading regimes and carbon taxes, security requirements and changes in social attitudes.
What level of price hike would be required to return airlines to sustainable profitability – and would customers be willing to bear such increases? What new thinking is emerging about sustainable aviation business models? Would airlines have to be taken into national ownership and subsidised by governments as a critical part of national infrastructure? What impact would a dramatic reduction in the number of airlines and flights have on our lives – can we imagine a life without flying? Which industries would be most disrupted?
The airline industry is of course just one of the sectors being confronted by fundamental questions about its long term viability – many others will follow in the next few years. But it is against this background that the Conservative-Liberal Democrat coalition government, one that has already played its hand as an opponent of aviation, takes power in Britain.
These are not idle threats
Lest anyone should still underestimate the gravity of the situation, these two statements, from the LDs prior to becoming part of the government, and from Friends of the Earth, make perfectly clear the problem.
Liberal Democratic Party, 30-Apr-2010: “Air travel is not taxed enough. The current charges on air travel do not reflect its environmental and economic cost. It has become cheaper to fly in real terms in recent years, and we need to make the polluters pay.” Source: telegraph.co.uk.
Friends of the Earth, Andy Atkins, Executive Director, 12-May-2010: "We're delighted that the new government has scrapped plans to expand UK airports - this is an encouraging sign that the coalition takes cutting aviation emissions seriously. They must now rule out expansion at regional airports too. We need a new aviation strategy which makes carbon reduction a priority and goes at least as far as Labour's target to limit aviation emissions to 2005 levels by 2050. Proposals to reform Air Passenger Duty are good news and will encourage airlines to use their planes more efficiently. But much of our emissions come from flying goods around - so the new tax must cover freight flights too."
The coalition may not prove durable. But so long as it does, these voices will gain unprecedented influence in what has already become an aviation-unfriendly UK environment. Although this is hardly a time to be encouraging aviation activity to migrate offshore - along with its massive halo of economic activity - rhetoric looks likely to prevail over logic for at least as long as the existing government remains in power.
(Editor of CAPA's Airport Investor Monthly, David Bentley - himself a minor party candidate in the UK election - investigated the UK's bleak aviation future)
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You may be interested to know that David Bentley stood for the UK Independance Party in Oldham East and Saddleworth, Manchester and attracted 4% - 1,720 votes.
