Gatwick Airport - Aviation Connectivity and the Economy Paper - 18 Apr 13

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Gatwick Airport Ltd Response to Discussion Paper 02 on Aviation Connectivity and the Economy
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    1 Response to Discussion Paper 02 on Aviation Connectivity and the EconomySubmission by Gatwick Airport Ltd   Reference: Airports Commission: London Gatwick 004   Date: 18 th April 2013 Summary Gatwick Airport Limited welcomes the discussion paper from the Airports Commission, AviationConnectivity and the Economy (Discussion Paper 02), dated March 2013. Our main comments aresummarised as follows - ã The cost of air travel should be a vital consideration in the Commission’s research. Connectivityis not just about availability but affordability. ã The Commission needs to give consideration to options which enhance the competitivedynamics of the UK aviation market – this competition will ensure route development that bestmeets the needs of the UK and foster competitive pricing due to airport and airline competition. ã The Commission’s analysis needs to recognise the connectivity that is being developed byLondon Gatwick. Connecting London to Indonesia is the latest example to support Gatwick’sview that competition can deliver the connectivity necessary to retain the UK’s status as aleading aviation hub. ã Caution should be applied when data from the past – reflecting common ownership of London’sairports – is used to derive conclusions of the future. Frontier Economics, commissioned byHeathrow, identifying Indonesia as a country that needed traditional hub capacity to connect itto London being a recent example of this. ã We continue to believe that reliance on the CAA’s survey data with respect to the number of transfer passengers over estimates the importance of this particular segment of the aviationmarket.London and the UK currently have excellent connections to the rest of the World. London Gatwickbelieves that competition between airports is the best way for this level of connectivity to beretained. Prior to the issue of the Commission’s paper on connectivity, we commissioned work inthis area. We are intending to submit this evidence to the Commission as part of the longer termoptions proposals on 19 July 2013.    Response to Discussion Paper 02 on Aviation Connectivity and the Economy 2 PreambleDefining Connectivity   London Gatwick supports the Commission’s focus on connectivity and its important contribution tothe UK economy. Retaining the excellent connectivity of London and the UK to the World will bean important test as to whether the Airports Commission has delivered an acceptablerecommendation to the Government (of the day) in 2015. Connectivity has both supply anddemand elements. ã   Supply Side  Carriers can achieve higher traffic levels on any given route if there are transfers from otherroutes operated by itself, its alliance partner and/or other unaligned carriers. This might resultin low costs (economies of route density), although such economies have diminishing returnsfrom transfer traffic and at some level of connectivity there may be little or no further benefit. ã   Demand Side  Consumers and the regional/national economy derive benefits from higher levels of connectivity. However, there are many dimensions to connectivity, each of which drive differentlevels of benefits: how many and which cities are connected, the frequency of service, thecompetitive choice of access, and the price of access. The latter two points are especiallyimportant and easily overlooked. Connectivity via a single monopoly carrier (or alliance) canlead to higher fares resulting in lower consumer benefits than connectivity to the same pointsby competing carriers. Likewise, connectivity via a single dominant airport is likely to lead tohigher fares, leading to lower consumer benefits than connectivity from competing airports.Air travel (like most forms of transportation) is a derived demand – for the most part, people travelto fulfil some other need: to conduct business, facilitate trade, enjoy a holiday or visit friends andfamily. This is even more apparent when considering air cargo – goods are flown to markets to besold or to be used as inputs into other production processes. In economists’ terms, air travel is afactor of production for another activity – a means to an end. In order for these other needs to bemet effectively, air travel should be convenient, available and affordable. The concept of connectivity can be used to evaluate these requirements.London Gatwick agrees with the Commission’s definition of connectivity which seeks to incorporatevarious dimensions: ã Availability of direct and indirect service; ã Level of frequency; ã Reliability and accessibility; and ã Cost of flight.As noted in paragraph 2.10 of the Commission’s paper, the UK is not geographically wellpositioned to capture transfer traffic to/from continental Europe and emerging markets in Asia.Accordingly, ensuring that the UK is effectively connected to world markets and destinationsshould be the focus of the Commission’s analysis, not whether a mega-hub for a dominant carrierand its alliance, with large flows of transferring passengers, can be developed in the UK. Suchmega-hubs are being developed in Dubai and Istanbul, which seek to serve transfer flows betweenEurope, Asia, Africa and other parts of the world but these have advantages in geographicallocation that the UK cannot replicate.    Response to Discussion Paper 02 on Aviation Connectivity and the Economy 3 In general, Gatwick supports the discussion on Chapter 2: ã We agree with the Commission’s description of the UK’s connectivity position and thecomparison with Paris, Frankfurt, Madrid and Amsterdam. We note that connections to manypoints in the UK (e.g., Birmingham, Southampton, etc.) are not viable for air carriers due to theshort distances involved and the availability of effective alternatives (road and rail). Merelycounting air  routes may understate the true connectivity of the UK market to the rest of theworld via London airports. ã Gatwick encourages the type of analysis in Figure 2-4 illustrating the connectivity with worldregions, and comparison with other major cities and airports. As well as Dubai Airport, wewould recommend Istanbul, given its rapidly emerging status as a major airport. ã The analysis of connectivity to the BRIC economies is valid and important. However, othermarkets are important and, in the long term, new markets may emerge which have not yetbeen anticipated. Thus, the focus should not be picking winners and losers, route-wise, butrather on ensuring that there is a framework and infrastructure that allows the UK to exploitnew opportunities as they arise. In particular, the Commission should be considering howcompetition will provide the connectivity that might be needed in the future. ã London Gatwick supports the conclusion that London and the UK are well connected today,although this connectivity is stronger in some markets than in others. We note that thisconnectivity, both short and long haul, is being provided by a number of airports and not justHeathrow. For example, Gatwick already provides connectivity to points in China, Vietnam, theMiddle East and Indonesia 1 (starting in Q4 2013).However, Gatwick is concerned about the use of CAA survey data for some of the analysis,particularly as it relates to transfer passengers at Heathrow and other airports. As noted in ourresponse to Discussion Paper 01 (Aviation Demand Forecasting), we have found that the surveysoverstate the proportion of transfer traffic at the London airports. Alternate data sources such asdata from IATA (PaxIS and AirportIS data products) are likely to be more accurate indicators of transfer passengers, since they are based on actual ticket bookings. How Aviation Connectivity Contributes to the UK Economy London Gatwick agrees with the Commission’s characterisation of the ways in which aviationcontributes to the UK economy. As mentioned in the discussion paper, in the first instance aviationgenerates employment and valued-added within its own sector – employment at airports, airlines,and other industries that supply and support aviation. This includes the high-value aerospaceindustry involved in the manufacture and servicing of aircraft and aircraft components a sector inwhich the UKs a world leader. However, aviation connectivity also facilitates the growth anddevelopment of many other sectors of the economy. This is sometimes referred to as catalyticimpacts or wider economic benefits. As the discussion paper describes, these impacts include: ã Trade in services; ã Trade in goods; 1 The announcement of a connection between London Gatwick and Indonesia was particularly relevant as Frontier Economics cited,in Heathrow’s “One hub or no hub” report, that the lack of a connection to Indonesia supports the need for traditional hub capacity.    Response to Discussion Paper 02 on Aviation Connectivity and the Economy 4 ã Tourism; ã Business investment and innovation; and ã Productivity.We recognise that the relationship between aviation connectivity and these catalytic impacts iscomplex – e.g. just as air connectivity can facilitate trade in services, trade in service increasesdemand for air travel. We also agree that while air connectivity alone is not sufficient for trade,tourism, investment and productivity, it is an important contributor.We agree with the concept of linking measures of each of these impacts to measures of airconnectivity, as has been done in Figures 3-1, 3-2 and 4-1, but question why only air capacity atHeathrow has been considered. As described in paragraphs 2.13 and 3.19 of the discussionpaper, London Gatwick offers connectivity to emerging long haul markets, as well as many othershort and long haul destinations. We recommend that the Commission uses measures thatconsider the connectivity contribution of all London’s and the UK’s airports. Trade in Services Gatwick supports the Commission’s description of the positive relationship between air connectivityand trade in services in paragraphs 3.11 to 3.25, which is effectively summarised in Table 3.1. Airtravel plays an important role in facilitating sales and business development and servicing clients.We also agree that the impact of teleconferencing technology on demand for travel is unclear atthis stage, although there is some evidence that its impact is neutral or possibly even positive (i.e.,teleconferencing is increasing the demand for air travel) 2 . Thus, we are of the view that it will havea negligible impact on air travel growth. The description of direct and indirect connectivity in Box3.1 is a very useful and effective description of the development of air connectivity and we agreewith the analysis.However, we question again why the value of UK service exports is compared with just seatcapacity at Heathrow rather than including other airports (or at least all London airports). We alsoquestion why existing capacity constraints at Heathrow are seen to be limiting the impact of theairports sector to accommodate long-term growth. The Commission is then correct to cite LondonGatwick to Indonesia as showing that competition may be possible of delivering the connectivityidentified as being necessary. Response to 3.24: The Commission would welcome submissions explaining how these factorsaffect business decisions and the wider issues which should be taken into account Empirical research has been conducted showing that air services have influence and help developtrade in services and related employment: For example, a study commissioned by IATA surveyed   625 businesses in five countries (China, Chile, United States, Czech Republic and France), andfound that 25% of their sales were dependent on good air transport links 3 . This percentage rose to40% for high tech companies. 2 E.g., Choo and Mokhtarian (2007), Telecommunications and travel demand and supply: Aggregate structural equation models for the U.S. 3    Airline Network Benefits , IATA Economic Briefing No. 3, 2006.
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