Third Heathrow runway is a flight of fallacy

Looks like a sound analysis to me.

Third runway is a flight of fallacy
Sunday Times
May 4, 2008
Bob Ayling (former chief executive of British Airways)

A third runway at Heathrow is against Britain’s economic interests. It is being driven by BAA, the Spanish-owned airport operator, and the misguided aspirations of British airlines. It is likely, in the long term, to prove a costly mistake.

The government’s “economic case” presented in the white paper is fairly clear - it wants to create a global “hub and spoke” network centred on Heathrow to compete with rivals on the continent. It envisages a huge passenger interchange.

This is a classic exercise in misguided central planning. What Ruth Kelly, the transport secretary, and the government do not see is that the transfer passengers, for whom such a hub would be built, spend no money in Britain, at least little beyond the price of a cup of tea, and Heathrow as an interchange is already so far behind its rivals that it is out of the game.

True, the pursuit of transfer passengers has fuelled Heathrow’s growth over the past 20 years. In 1992 transferring passengers made up only 9% of the total passenger traffic, compared with a third today.

Such rapid growth has left little room for operational error. The airport struggles to cope with more than 68m passengers using buildings and baggage systems designed to handle 45m, while its two runways operate at 99% capacity. As a result even the tiniest problem can snowball into delays, making the Heathrow experience often akin to the Third World. It is a national disgrace.

Yet we are set to repeat this mistake. Under current growth assumptions, Heathrow will be full again within a decade of the opening of a third runway. How the airport will cope with 135m passengers a year and 702,000 flights after 2030 is not explained.

The central problem lies with the hub-and-spoke model itself, which assumes that Heathrow will attract more business and be more efficient if it acts as an interchange for passengers en route to other destinations. This model was pioneered by Federal Express in the 1970s, when the postal firm began flying packages from a central hub in Memphis.

When the US passenger airline industry was deregulated in 1978, the big airlines followed the FedEx model to fend off new, low-cost airlines. However, people are not parcels; missed connections, lost baggage and delayed flights created inefficiencies, contributing to the bankruptcy of almost every US airline.

Nonetheless, European airlines with similar motives have spent billions trying to follow suit. In the 1990s the French government opted to subsidise Air France and then built a new hub at Charles de Gaulle. It has four full-size runways and by 2010 will have more than 700,000 flights a year. Amsterdam now has five runways. However, in Europe too there have been failures or near-failures, including Sabena, Alitalia and Swissair.

The most commercially successful airlines - Ryanair, easyJet and SouthWest - have all rejected the hub model and flown passengers direct to their destinations. And yet BAA and the government seem not to have learnt from these lessons. For Grupo Ferrovial, the owner of BAA, this is perhaps not surprising. The perverse incentives under which it operates mean it is encouraged to increase congestion. BAA is an almost recession-proof business, paid by the number of flights and passengers it can squeeze in and out of Heathrow.

There is no penalty for congestion or poor customer satisfaction, and no penalty for the mountains of lost baggage or delayed flights. Its monopolistic grip over London’s main airports has also meant it has little incentive to consider expansion at Gatwick as a viable alternative.

An expanded hub at Heathrow might not even be beneficial to BA. Transfer traffic in its own right is loss-making. First, fares have to be cut to compete with the direct service and to compensate for the inconvenience of changing at a hub. Second, costs are higher as the airline pays twice for landing fees and handling costs when passengers and baggage change aircraft.

In 1997 BA swapped some of its Boeing 747-400 orders for smaller 777s, which cost less and took about 60 fewer passengers. The airline was reducing its growing dependence on transfer traffic and flying more people direct to their destinations. This seemed to me a sensible approach and a good basis for planning the future of Heathrow, leaving Paris and Amsterdam to invest in the costly capital assets of a hub.

It puzzles me to see superjumbos now being ordered for Heathrow. How will they be filled? The only way the airlines will attract enough business is if Heathrow becomes a much bigger hub interchange, which I doubt it can be.

There is another way. First, the government should ditch its airports white paper. Second, it should strip the Civil Aviation Authority of its role in regulating BAA. Third, the Competition Commission should break up BAA.

This would enable Heathrow and its airlines to focus on fewer flights, not more, turning away from the hub airport and towards flying passengers direct to their destinations. At the same time, instead of operating at 99% capacity, Heathrow should be operating at 80%, with a proper market for slots to allow airlines to monetise their investments so they can move to another airport. With fewer flights, Heathrow could focus on punctuality and service.

And the other runway? London’s growth will certainly need one, so why not look to Stansted and Gatwick? Both are well located and under separate ownership could develop new markets. Building a third runway at Heathrow is not the answer.