Heathrow s Response to the Revised Draft Airports National Policy Statement

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1 Heathrow s Response to the Revised Draft Airports National Policy Statement 19th DECEMBER 2017

2 Contents Executive Summary Introduction Aviation Forecasts Introduction International Connectivity Economic Benefits Delivering early benefits Summary Air Quality Introduction Summary of Heathrow s May 2017 Draft NPS submission Defra Air Quality Plan Further re-analysis carried out by the DfT Our Proposed Mitigation Measures Summary Other environmental topics Introduction Carbon Noise Surface Access Habitats Regulations Assessment (HRA) Summary Other matters arising from the revised draft NPS Introduction Crossing the M Affordability and Financeability Scheme Promoter Runway The role of the Annexes Associated Development Green Belt Role of the Civil Aviation Authority in the DCO process Safety Domestic Connectivity Summary Conclusions Appendix 1 Paragraph by Paragraph Response to the Revised Draft NPS Appendix 2 Habitats Regulations Assessment Appendix 3 Updated Economic Analysis by Frontier Economics: Competition & Change 2017 (December 2017)... 99

3 Executive Summary We welcome the publication of the revised draft Airports National Policy Statement (NPS) and its updated evidence base. The Government s revised passenger forecasts show that the need for expansion at Heathrow is now more urgent than ever. Brexit only increases the need to secure the significant economic benefits that an expanded Heathrow will deliver. As the UK s hub airport, only Heathrow can deliver these benefits quickly and with more certainty. Building on this evidence base, the revised draft NPS therefore confirms the Government s view that there are no alternatives that would deliver the NPS objectives of increasing airport capacity in the South-East and maintaining the UK s global hub status. We welcome the conclusion in the revised draft NPS that only Heathrow can meet the UK s international connectivity needs, but we maintain that the Government s economic appraisal of expansion continues to underestimate Heathrow s benefits both in terms of passenger benefits from reduced fares and wider economic benefits from trade, tourism and investment. Analysis undertaken for Heathrow by Frontier Economics 1 has estimated that these could add up to a further 113bn in catalytic benefits to UK GDP. Moreover, the benefits arising from the greater opportunity for improved domestic connectivity at Heathrow have not been fully acknowledged. Recognition in the NPS of these crucial benefits, which can only be fully realised by expanding the UK s hub airport, would reinforce the strong economic case for expansion at Heathrow. Add to this the potential to deliver early benefits from additional movements off the existing two runways as an early phase of expansion, and the case for expanding Heathrow becomes even more compelling. The revised air quality analysis reaffirms that the north west runway can be delivered in a way that is consistent with the UK s legal air quality obligations, even though the analysis is based on a worst case assumption which takes no account of our own proposals for limiting and mitigating air quality effects. In respect of other environmental matters, our response confirms that: the new carbon analysis feeding into the revised draft NPS provides additional assurance that expanding Heathrow can be undertaken consistent with the UK s climate change obligations; we are confident that expansion will meet the noise assessment principles in the revised draft NPS; and we are confident that the Habitats Regulations Assessment (HRA) will confirm that expansion can be delivered without adverse effects on the integrity of European protected sites. 1 Frontier Economics (December 2017), Competition & Choice 2017 this report forms Appendix 3 to this response. 1

4 In respect of the delivery of Heathrow s expansion, both through the development consent order process and beyond, we make the following comments and recommendations of relevance to the revised draft NPS: Expansion is both deliverable and affordable our work has demonstrated that expansion can achieve a capacity of at least 740,000 ATMs (air traffic movements) per annum whilst operating safely and maintaining airport charges close to current levels; We are now even more confident in our proposals to build the runway over the M25; In bringing certainty to delivery, we consider that the NPS should specify Heathrow Airport as the only plausible promoter of the scheme or, at the very least, set out clear operational, funding and compliance criteria which any promoter would need to fulfil in order to bring forward the delivery of the scheme; The NPS should recognise the need for a runway of approximately 3,500m but should allow some flexibility to promote a slightly longer or shorter runway, such as may be required to take account of consultation feedback and further scheme design, provided it can achieve the same capacity and operational performance; The NPS should provide clarity on the status of the illustrative plans in the Annexes to the revised draft NPS; The NPS should recognise the need for any DCO application to make provision for necessary associated development; The NPS should confirm that the Green Belt test of very special circumstances will be considered to be met in relation to Heathrow s expansion and should remove the requirement to provide replacement Green Belt; The NPS should provide guidance to clarify the role of the CAA in the DCO process, including as a statutory consultee; and The NPS should recognise the role that Government has to play in securing improved domestic connectivity through the use of Public Service Obligations. We welcome the steps that the Government has taken to revise the draft NPS to create a rigorous policy framework for testing a DCO application for Heathrow s expansion. We look forward to delivering Heathrow's expansion against the final designated NPS. 2

5 1. Introduction We support the Government s decision to consult on the revised draft NPS and the refreshed evidence base. We welcome the opportunity to make representations on the revised draft and the implications of that evidence base in the context of Heathrow expansion, particularly in relation to publication of the revised passenger demand forecasts and the 2017 Air Quality Plan Our representations should be read in conjunction with our previous response to the initial draft NPS in May We have taken the opportunity to expand on and reiterate previous comments where appropriate The changes made in the revised draft NPS have helped to strengthen and clarify the draft NPS. We are very supportive of both the principle and most of the detail of the revised draft, which sets out a strong framework for the promotion of the north west runway We have some further comments on the detailed drafting of elements of the revised draft NPS, and these comments are set out and explained in this consultation response. In particular, we consider that there are some areas where the NPS and its supporting documents could be clearer, particularly taking into account the way in which the NPS will be applied during the examination of a DCO application for the north west runway In this response, we also provide an update on our progress with the practical delivery of the new runway and the work that is being undertaken with airlines and others to enable delivery whilst maintaining airport landing charges at close to current levels We have had particular regard to the matters that the Department for Transport (DfT) has identified in its consultation document as having changed between the draft NPS and the revised draft NPS, although we have not entirely confined our comments to these matters This response is structured as follows: Section 2: The revised aviation forecasts; Section 3: The air quality re-analysis; Section 4: Other environmental topics, where we provide comments in relation to: Carbon; Noise; Surface Access; and the Habitats Regulations Assessment; Section 5: Other matters arising from the revised draft NPS, including runway length and M25 crossing, scheme promoter, associated development, NPS annexes and domestic connectivity; and Section 6: Conclusions In addition, to capture our detailed comments on the precise wording of the revised draft, Appendix 1 provides our response to specific paragraphs of the revised draft. 3

6 Appendix 2 sets out additional information to provide further confidence that the north west runway scheme is not expected to have an adverse effect on integrity of any European protected sites under the Habitats Regulations Appendix 3 contains the report Competition & Choice 2017, analysing the DfT s updated passenger demand forecasts and the benefits of Heathrow expansion, produced by Frontier Economics, commissioned by Heathrow. 4

7 2. Aviation Forecasts 2.1. Introduction We welcome the DfT s updated UK aviation forecasts, which clearly show that the need for Heathrow expansion is now more urgent than ever. The Airports Commission estimated that the cost to passengers of not providing additional capacity would range from 21-23bn over 60 years and that the cost to the wider economy could be between 30-45bn. We agree with the Government s conclusion that: Recent demand growth in the South East suggests an even greater possible cost if expansion is not undertaken (NPS paragraph 2.17) The updated aviation forecasts and appraisal report clearly show that only expansion at Heathrow can deliver the objectives of the NPS and, significantly, that only Heathrow can deliver the benefits of expansion quickly. Brexit means it is even more important that we deliver the benefits of expansion, and we welcome the recognition of this in the revised draft NPS: The Government considers that following the country s decision to leave the European Union the country will increasingly look beyond Europe to the rest of the world, and so the importance of maintaining the UK s hub status, and in that context long-haul connectivity in particular, has only increased. (NPS paragraph 2.32) In terms of international connectivity, the revised draft NPS is correct to be very clear that: Heathrow is best placed to address this need by providing the biggest boost to the UK s international connectivity. (NPS paragraph 3.18), and By contrast, expansion of Gatwick Airport would not enhance, and would consequently threaten, the UK s global aviation hub status. (NPS paragraph 3.19) (emphasis added) The constraints at Heathrow in recent years have held back the UK economy. They have also imposed costs on passengers and business. This is apparent from increasing unmet demand at airports, identified in the revised forecasts. This is also evidenced by the congestion premium that is paid for flights: the increased cost of flying due to excess demand Updated economic analysis by Frontier Economics 2 (included at Appendix 3 to this response) shows that in 2016 passengers paid 23% more to fly from Heathrow than from other London airports and 25% more than from other European airports. This congestion premium, or excess fares, cost passengers at Heathrow a total of 2bn in In addition, there is now also a 28% premium on short-haul fares, whereas in 2012 no premium was present. 2 Frontier Economics (December 2017), Competition & Choice

8 This provides clear evidence that the capacity constraint at Heathrow is now impacting both short-haul and long-haul flights. In contrast, no statistically significant premium could be found at Gatwick. Frontier Economics estimates that if Heathrow remains constrained the congestion premium cost borne by passengers would rise to roughly 8bn by Conversely, if Heathrow expands, more capacity will become available, competition will increase, fares will reduce and passengers will benefit Moreover, the updated aviation forecasts demonstrate that what is urgently needed is the capacity to achieve connectivity to growing markets, which requires hub capacity. Our response to the first draft of the NPS clearly set out why only Heathrow can provide hub capacity. We are pleased to see this reflected in the revised draft NPS We set out below our comments on the principal matters arising from the DfT s revised UK aviation forecasts and their relationship to the revised draft NPS International Connectivity The updated aviation forecasts 4 (for ATMs, seats and destinations served) all show that Heathrow expansion will deliver greater and earlier connectivity benefits than expansion at Gatwick The forecasts estimate that by 2030 Heathrow expansion would deliver an additional 129,000 flights to the UK compared to only 11,000 with Gatwick expansion. Most significantly, 35,000 of these would be long-haul, whereas Gatwick expansion would only deliver 1,000 additional long-haul flights by In fact, Gatwick s long-haul forecast has decreased by 3,000 flights from earlier Airports Commission forecasts International connectivity is the essential characteristic of a hub airport and it is appropriate that the revised draft NPS attaches particular importance to Heathrow s unique role as the UK s only hub airport. Our submissions in relation to the draft NPS in May 2017 clearly set out the reasons why only Heathrow can provide this vital hub capacity: Hub airports are proven around the world to be the most effective way to deliver the long-haul connectivity essential for economic growth (paragraph of our May 2017 submissions 6 ); It is the combination of transfer passengers and cargo, which is only present at a hub, that enables direct connections on long-haul routes that would not be viable with local demand alone (paragraph ); 3 Additional references to the importance of hub capacity are now included at paragraphs 2.32, 2.33, 3.12, 3.14, 3.17 and DfT (October 2017) UK Aviation Forecasts 5 DfT (October 2017) Updated Appraisal Report, Airport Capacity in the South East, table 3.1, page All paragraph references in these bullets are to our May 2017 submission in response to the draft NPS consultation. 6

9 Heathrow is the UK s only hub and, due to the economic advantage of operating at a hub, the overwhelming response of airlines to the Airports Commission was to support Heathrow expansion (paragraph 2.2.4). The demand to operate at Heathrow is demonstrated by its significantly higher slot values (paragraph 2.2.5); and It is highly unlikely that another airport could establish itself as a second hub or deliver the long-haul connectivity required without the hub model (paragraphs ) This is demonstrated by the actions of airlines, which prefer hub airports, as they support the movement of price-sensitive transfer passengers and smooth out the variability of origin-destination demand 7. The airlines champion expansion at Heathrow and choose to operate out of Heathrow despite premium slot prices The revised draft NPS now recognises more clearly a requirement for hub capacity and identifies that it is the expansion of Heathrow which will provide the biggest boost to the UK s international connectivity This is wholly supported by the revised forecasts which now show a greater difference in the number of daily destinations to which the UK would connect by 2030 with an expanded Heathrow than with an expanded Gatwick (9 short-haul, 16 long-haul compared to 2 and 7 in the Airports Commission forecasts Gatwick would lose a short-haul destination and gain only 2 long-haul) 9. Although the Government already has good evidence for its conclusions, the work undertaken by Frontier Economics 10 further strengthens those conclusions by more fully capturing the benefits of the hub dynamic, including the full potential increase in route viability Whilst we welcome the conclusions that Heathrow expansion delivers the greatest benefits, work by Frontier Economics 11, based on the latest forecasts, builds on the DfT model by taking into account the existing constraints on Heathrow s connectivity Frontier Economics has identified over 40 potential new twice-weekly long-haul connections which could be added by 2030 at an expanded Heathrow, but only two at an expanded Gatwick (utilising a threshold of twice-weekly connections carrying 500 departing passengers per week) Frontier Economics demonstrates that Gatwick has struggled to support longhaul connections even though it has had spare capacity to utilise, losing 11 connections between 2010 and During the same period, Heathrow has 7 Origin-destination demand refers to all direct passengers (i.e. those not transferring between flights) 8 Para 3.72 of revised draft NPS. 9 Airports Commission, Strategic Fit: Forecasts, July Frontier Economics (December 2017), Competition & Choice, Frontier Economics (December 2017), Competition & Choice,

10 been constrained. Even so, connections to Hanoi, Ho Chi Minh City and Jakarta switched from Gatwick to Heathrow, and became more frequent The much greater growth in long-haul connectivity arising from expansion at Heathrow compared to Gatwick, as shown by the updated forecasts, rightly reflects the crucial role of a hub airport in improving flight viability - the critical outcome necessary to achieve the objectives of the draft NPS Economic Benefits We agree with the DfT s revised UK aviation forecasts that the growth in ATMs and passengers at Heathrow with the north west runway will be faster than expected by previous forecasts used by the Airports Commission. We agree that unconstrained demand at Heathrow is higher than previously thought and that this is a further endorsement of the need for urgent development of additional runway capacity at Heathrow Our initial view, however, is that the release of additional capacity afforded by a three runway Heathrow is likely to be phased such that the additional throughput will be somewhat slower than appears to be assumed in the latest DfT aviation forecasts (although still faster than was assumed in the previous forecasts) It has always been intended that the north west runway scheme would be phased. Our submission to the Airports Commission 12 in 2014 proposed the phased delivery of assets in line with passenger demand. In our submission, we outlined the delivery schedule for the north west runway scheme, which detailed the proposed development of the new Terminal 6 in four phases, so as to match passenger demand over the 3 years following the new runway opening. Our submission also outlined how the remainder of the Heathrow masterplan would be phased through to There are a number of reasons why it is likely to be desirable to phase the introduction of new capacity, including: it is a more cost-efficient way of delivering large scale infrastructure; new assets can be brought into use as and when ready, whilst other parts of the project remain under construction, thereby delivering early benefits; it enables passenger growth to be accommodated whilst ensuring the programme is affordable and keeping the passenger charge close to current levels; it also reduces operational impacts on airport users and ensures the best customer experience; and it allows time for airlines to schedule and develop new routes. 12 Heathrow, Volume 3 of full technical specification, submitted in May

11 This is likely to be true for all airports wanting to expand, and Heathrow is no different to the other short-listed schemes in this regard. Nevertheless, we agree with the overall message inherent in the forecasts: that unconstrained demand is higher than previously forecast, that growth in airport capacity is urgently needed and that it is needed most at Heathrow The revised forecasts attracted some attention when it was reported that they identify greater potential long term economic benefits from the expansion of Gatwick. Over a 60-year appraisal period, Gatwick is now forecast to have higher total benefits (direct + wider economic impacts) than Heathrow ( bn for LGW vs bn for LHR; figures are cumulative up to 2085) It is clear, however, that the benefits to passengers and the wider economy will be realised more quickly under Heathrow expansion. In fact, Gatwick only overtakes Heathrow in the late 2070s. When focussing on shorter horizons, the updated estimates forecast that Heathrow will add 10.7bn by 2040 and 23.2bn by 2050 to the UK economy while Gatwick is forecast to contribute only 4.9bn by 2040 and 17.3bn by We recognise that it is standard practice that publicly funded projects are appraised over a 60 year period. However, in the case of privately funded expansion of airport capacity in the South East, we consider that more weight should be placed on the benefits delivered earlier. This is because the longer the forecast horizon, the greater the uncertainty in the forecast. This is particularly true in this case, as the aviation forecasts are only modelled until 2050 and are simply extrapolated from 2051 to Frontier Economics 13 has raised concerns about this extrapolation. Examining DfT s findings, it is unclear on what basis the passenger benefits of Gatwick expansion can be expected to accelerate at a faster rate than Heathrow, particularly as both airports are already full by 2050, from which date the figures are extrapolated We support the DfT s choice, therefore, to focus on total benefits and net social benefits 14, which is more consistent with a privately financed scheme. If private investors are willing to invest a larger sum at Heathrow than at Gatwick there is no reason for the Government to regard this as a negative. What is relevant from the point of view of the public interest is that the Heathrow proposal offers substantially higher net social benefits Because the costs of either of the two schemes would be mostly borne by private investors, net present value is not relevant. When assessing net figures, net social benefit should therefore be preferred. The net social benefits of Heathrow ( bn) are between 88% and 100% higher than those of Gatwick ( bn). This is partly because airline profit loss 15 is significantly lower for expansion at Heathrow than at Gatwick. 13 Frontier Economics (December 2017), Competition & Choice Please see Frontier Economics (December 2017), Competition & Choice 2017, Figure 4 (pg. 13) for a definition of net social benefit. 15 Airline profit loss describes the loss to airlines as a result of lifting the capacity constraint (i.e. no longer being able to charge premium fares). 9

12 We agree with the DfT s conclusions that Heathrow expansion would provide benefits far more quickly to a greater number of people and with a higher degree of certainty. Passenger Benefits Due to the higher demand with both Heathrow and Gatwick expansion, the passenger benefits for both schemes have increased significantly compared with the Airports Commission assessment. Over the 60 year period assessed, Heathrow expansion would generate total passenger benefits of 67.6bn Whilst we welcome this confirmation, it remains our view that the modelling framework adopted by the DfT does not fully capture the particular characteristics of a hub airport and therefore underestimates the full potential passenger benefits of Heathrow expansion. In particular, shortcomings of the model are that it: assumes that adding new capacity at either airport would have the same impact on reducing the excess fares charged by airlines (and this is the principal basis on which direct benefits are calculated); assumes hub and point-to-point capacity are largely interchangeable (although we accept that some improvements have been made to the model in this respect); does not fully reflect a hub s unique ability to improve long-haul flight viability; does not reflect material changes in the overall UK demand arising from different expansion options; and underestimates low cost carriers desire to operate from Heathrow Frontier Economics 16 advises that the DfT model significantly underestimates the benefits of Heathrow expansion to passengers, and distorts the relative impact of the Heathrow and Gatwick expansion options in favour of Gatwick. This is because the DfT s model does not take account of the existing capacity constraints at Heathrow when determining the reduction in excess fares as a result of expansion, which means it significantly underestimates the benefits to passengers. Frontier Economics estimates that the excess fares at Heathrow in 2016 cost passengers 2bn. Frontier Economics also highlights that, as the DfT model does not recognise that Heathrow is already constrained, it underestimates the current passenger preference for flying from Heathrow and therefore understates how demand would respond to new capacity in the future. 16 Frontier Economics (December 2017), Competition & Choice

13 However, even with these significant constraints in the model, the updated forecasts demonstrate substantially greater economic and passenger benefits at Heathrow than at Gatwick in the years to Wider Economic Benefits For the reasons set out above, we maintain that the revised DfT appraisal does not fully capture the extent of the economic benefits of Heathrow expansion relative to Gatwick. Further to this, the DfT approach limits itself to a conventional cost-benefit appraisal framework, which captures only a small portion of wider economic benefits of airport expansion. This approach fails to account for a range of wider positive economic impacts, including: additional trade and foreign direct investment (FDI); growth in freight movement; and improved domestic connectivity Estimated wider economic impacts are therefore presented as surprisingly low for both schemes ( bn for Gatwick and bn for Heathrow). Trade and Foreign Direct Investment (FDI) The DfT s analysis could be improved by taking account of impacts arising from trade and FDI in fostering productivity. The current omission of such impacts leads to a significant underestimation of benefits, particularly at Heathrow. The DfT explains this choice by stating that in seeking to capture such wider benefits there is a risk of double counting benefits which have already been captured as direct benefits to business travellers: This double-counting is thought to largely occur in two ways. Firstly, where trade induced productivity benefits accrue to a business passenger s firm, these impacts can be expected to be incorporated into purchasing decisions and thus be reflected in direct business passenger impacts. Secondly, because trade studies do not separate out the two effects, the estimated trade impacts will include some impacts already attributed to agglomeration effects With respect to the first point, whilst it can be argued that the "first round" effects on businesses is already captured in the greater passenger flows, the wider benefits of trade and FDI in raising the productivity of the economy are not captured. The second point is no longer valid because in the Updated Appraisal Report 18 agglomeration impacts are also excluded so there would be no double counting of these benefits. The work undertaken by Frontier Economics confirms that the second concern about double counting set out 17 Department for Transport, Further Review and Sensitivities Report (October 2016) page Department for Transport, Updated Appraisal Report Airport Capacity in the South East (October 2017) 11

14 above has been addressed, and provides more detail on the channels through which trade and FDI can foster economic growth and employment While difficult to estimate with precision, the Frontier Economics analysis 19 demonstrates a robust positive relationship between air connectivity, trade and growth, and we consider that these effects should be recognised in the reporting of total economic benefits The DfT does state that the much greater increase in flights at Heathrow means that Heathrow expansion continues to be expected to provide significantly greater trade benefits throughout the assessment period, although the analysis does not include these benefits in the main appraisal The fact that Heathrow is predicted to add more long-haul flights in particular to fast-growing economies reinforces the benefits deriving from trade. The high level of integration already present in Europe reduces the scope for meaningfully increasing transfers of knowledge and technology, while this scope is likely to be very high with more distant economies In addition to trade, FDI should be reflected in the quantified economic impacts. FDI is beneficial to the host country principally through productivity gains. Technology and know-how transfers will boost long run productivity and consequently economic growth. This is particularly valid for inward FDI, but also outward FDI can be beneficial if investing abroad results in a more efficient utilisation of a company s capital. The exclusion of these benefits means that the total economic benefits of Heathrow expansion are even further understated in the DfT s latest analysis. Heathrow expansion would help the UK economy secure its position as a world class destination for inward foreign investment The Frontier Economics analysis 21 of the catalytic effects of a third runway at Heathrow confirms that these effects should also be taken into account. The logic behind catalytic effects is that following expansion, passengers of all types will pay lower air fares (captured by the DfT s passenger benefits), and in parallel, additional trade and FDI will be facilitated because more business passengers will be able to fly (i.e. the catalytic effects that are not captured in the DfT s model). This catalytic effect is separate and considered to be additional to the economic benefits estimated by the DfT 22. We submit that the catalytic effects should therefore be taken into consideration in addition to those already accounted for in the DfT s analysis Frontier Economics has estimated that a third runway at Heathrow will add more than 113bn of catalytic impacts to the UK economy, compared with 41bn at Gatwick 23. The catalytic impacts flow directly from the increased connectivity that only Heathrow can achieve. Therefore, taken together, the 19 Frontier Economics (December 2017), Competition & Choice Department for Transport, Updated Appraisal Report Airport Capacity in the South East (October 2017) 21 The catalytic impact of expansion at Heathrow updated analysis, July 2017, Frontier Economics 22 Frontier Economics (December 2017), Competition & Choice Frontier Economics (December 2017), Competition & Choice

15 catalytic impact above and the DfT s impacts could lead to a total benefits figure of more than 180bn for Heathrow These wider benefits further justify the selection of Heathrow north west runway as the preferred scheme in the NPS. It would be appropriate, therefore, for the NPS to fully recognise that these additional benefits are also likely to arise. Freight The DfT model also excludes trading benefits from its appraisal. This denies the substantially greater value of Heathrow s cargo throughput to the UK economy, and Heathrow s unique ability to substantially grow freight volumes with expansion Heathrow handles more UK trade by value than the top-3 seaports combined, and this value is set to grow significantly with expansion at Heathrow. We forecast that Heathrow will handle a total of 1.7m tonnes of cargo in 2017, the highest volume of goods handled on record at the airport so far. This growth is led by transhipment and export activity and demonstrates that Heathrow is well placed to both support and benefit from growing global trade Cargo and seat capacity are intrinsically linked as airlines factor both cargo and passenger demand into their route and fleet deployment planning. Typically, the aircraft types with the highest cargo capacities also have the highest passenger capacity The importance of Heathrow as the UK s largest freight gateway by value is demonstrated in the following table, which ranks UK freight ports by trade value in : Trade Rank (Value) Port Imports and Exports Value ( m) 1 London Heathrow 133,058 2 Southampton 46,381 3 Felixstowe 44,291 4 Inland Clearance Not specified* 5 Other Not specified* 6 London Stanstead 12,096 7 Liverpool 11,980 8 East Midlands Airport 9,278 9 London (inc. Tilbury) 7, Immingham 7, Low Value Trade Not specified* 12 London Gateway 7, Manchester Airport 6, Middlesbrough 5, Milford 4, Hull 3, Based on data gathered from UK TradeInfo; CAA Statistics (Airports Table 13); Heathrow analysis 25 UK TradeInfo (2016). Imports and exports, non-eu, including Switzerland. 13

16 17 Avonmouth 3, Glasgow Airport 2, Aberdeen 2, Grangemouth 2, Belfast 2, Ellesmere Port 1, Hound Point Terminal 1, Peterhead 1, Birmingham Airport 1, Tyne 1, Warton Aerodrome 1, Prestwick Airport 1, Dover 1, Medway 1, Cardiff Airport 1, Harwich 1, Thamesport 1, Greenock 1, Postal Packages Not specified* 36 PoC Unknown Not specified* 37 Aberdeen Airport Norwich Airport London Gatwick 782 *This table only presents data relating to specific ports in the UK other non-port entries are shown as not specificied Only hub airports offer airlines the ability to connect global trading centres quickly and easily. For example, Heathrow offers companies in India the ability to ship their goods to North America and in doing so it enables airlines to offer UK passengers more frequent flights on modern, cargo-friendly aircraft to both India and North America The expansion of Heathrow will enable cargo capacity to be doubled. The trade benefits of the substantial growth in freight volumes and values that this would facilitate should be fully recognised in the evidence base which supports the NPS. These benefits lend even more support to the Government s robust conclusion in paragraph 3.24 of the revised draft NPS that expansion at Heathrow delivers the greatest benefit in relation to air freight. Domestic connectivity The latest DfT passenger forecasts confirm that only Heathrow is able to sustain long-haul connectivity (both with regards to the breadth of connections and their frequency) to emerging market destinations, and to support the onward connectivity that UK domestic passengers value. These forecasts also confirm that overall passenger demand is higher than forecast, highlighting the need for the DfT to come to a sustainable solution that will guarantee an appropriate level of domestic connectivity at Heathrow. 14

17 As outlined in our May 2017 submission (paragraph 2.6.3), Heathrow remains better suited to support domestic routes than other shortlisted schemes, offering both a better point-to-point connection to central London and onward connectivity to the rest of the globe through a denser long-haul network. The opportunity for new and improved domestic routes is greater at an expanded Heathrow because capacity constraints have so far prevented major UK domestic operators (EasyJet, Flybe) from entering Heathrow at scale. We note that Easyjet s domestic network has reached maturity at Gatwick and that Flybe exited Gatwick (save for continuing to operate a Government supported route to Newquay) after charges for domestic flights increased. Whilst we have gained domestic routes to Leeds Bradford and Inverness, Gatwick has lost routes to Manchester, Newcastle and Belfast City. We can confirm that UK-based carriers remain very interested in operating domestic routes at Heathrow today and in the future, based on the measures we have proposed The updated forecasts continue to support the Government s conclusion in paragraph 3.32 of the revised draft NPS that an expanded Heathrow will mean that more passengers from across the UK are likely to benefit from access to important international markets. These benefits from Heathrow expansion should be recognised in the NPS. Please refer to Section 5.11 of this response for our detailed representations on domestic connectivity Delivering early benefits The planning permission for the construction of Terminal 5 restricted the total number of ATMs permitted at Heathrow to 480,000 per annum. This restriction will need to be lifted to enable Heathrow to achieve at least 740,000 ATMs per annum Our representations in May 2017 suggested that it would be appropriate for the NPS to reference the potential for early release of ATMs as a first phase of expansion i.e. an approximate additional 25,000 ATMs per annum on the existing runways before the new runway opens, an initiative which we termed a Brexit Boost. This early release of capacity could: support up to 5,000 jobs; result in a 1.5 billion boost to the UK s GDP; and support the expansion of domestic routes. We would therefore like the opportunity to release capacity as soon as practicably possible following DCO approval The revised draft NPS suggests that the underlying demand at Heathrow would in theory see the airport close to capacity by 2028, compared to the Airports Commission s projected date of Whilst growth in capacity in practice would necessarily be more incrementally phased, the strength of the forecasts illustrates the urgent need for expansion at Heathrow. Consistent with this, the National Aviation Strategy call for evidence, published in July 2017, challenged the UK s airports to make more intensive use of existing airport capacity. 15

18 This challenge could be met through the early release of capacity, thus bringing additional passengers to Heathrow and allowing the economic benefits of additional flights to begin to be realised three years earlier than had previously been envisaged The equivalent of up to 35 daily new routes or additional frequencies on existing routes could be unlocked through this approach delivering up to 1.5 billion in economic benefits to the UK by connecting Britain s exporters to new and existing markets more frequently. This would create additional jobs both directly at the airport and indirectly within related industries, whilst improving UK domestic connectivity to London and the world The potential to release extra capacity early is also important to Heathrow delivering on the challenge set by the Secretary of State for Transport to deliver expansion at an affordable price to its airline customers. This increase in passenger numbers during the early construction phase results in a circa reduction in the projected peak airport charge during the H7 regulatory period, thus contributing significantly to maintaining charges at close to current levels Our May 2017 representations in relation to the draft NPS recognised that any such proposal would need to be the subject of full public engagement and environmental assessment as part of the preparation of our DCO application and that the acceptability of such a proposal would need to be considered against the assessment principles and requirements in the NPS, together with any mitigation proposed It would be helpful if the NPS acknowledged the possibility that a DCO for the north west runway may provide for a release of additional capacity on the existing runways before the third runway opens and the important early benefits that this could bring Summary The revised DfT aviation forecasts confirm the urgency of the need for additional airport capacity and demonstrate that it is expansion at Heathrow that is uniquely placed to bring substantial economic benefits far more quickly and with more certainty than expansion at Gatwick. The DfT evidence base supports the conclusion in the NPS that only Heathrow meets the overall needs case for increased capacity and in maintaining the UK s hub status. The DfT s economic appraisal, however, continues to underestimate the economic benefits of Heathrow expansion by not fully recognising the significant passenger and wider economic benefits from trade, tourism and investment that would be realised. Recognising these additional benefits in the NPS would further reinforce the strength of the case for expanding Heathrow. We recommend that the NPS also recognises the potential economic benefits uniquely available at Heathrow through the early release of capacity on the existing runways in advance of the construction of the north west runway. 16

19 3. Air Quality 3.1. Introduction The revised draft Airports NPS is accompanied by the 2017 Plan Update to Air Quality Re-Analysis ( 2017 Plan Re-Analysis ). The 2017 Plan Re-Analysis updates earlier analyses by reference to the Department for Food Environment and Rural Affairs (Defra) UK plan for tackling roadside nitrogen dioxide concentrations: Detailed Plan, July 2017 (the 2017 Air Quality Plan ) and the Government s updated passenger demand forecasts Taking into account the 2017 Plan Re-Analysis we remain confident, as set out in our submissions to the Transport Select Committee in both March and December 2017, that Heathrow expansion can take place consistent with all relevant legal obligations in relation to air quality. The 2017 Plan Re-Analysis supports this view and is consistent with the conclusions previously reached by the Airports Commission, the Government and Heathrow This section: briefly summarises our response to the draft Airports National Policy Statement consultation; summarises the implications of the 2017 Air Quality Plan; summarises Heathrow s position on the 2017 Plan Re-Analysis published with the revised draft NPS; sets out the suite of mitigation that the 2017 Plan Re-Analysis does not take into account; and explains how our proposed mitigation will reduce uncertainty and how we will manage this through our project level assessments Summary of Heathrow s May 2017 Draft NPS submission Our response to the consultation on the draft Airports National Policy Statement, published in May 2017, expressed confidence in our ability to demonstrate that Heathrow Expansion will meet the UK s legal air quality obligations In our response we noted that: the comprehensive mitigation strategy proposed by Heathrow to reduce the air quality impacts of the north west runway scheme is expected to be effective in managing concentrations of NO2 at critical locations. We noted that the introduction of a form of road-user charging could, if necessary, bring further reductions in NO2 concentrations at key locations; and uncertainty regarding the emissions performance of road vehicles, particularly diesel cars, was accounted for in analysis of the predicted impacts of the north west runway scheme. Such uncertainty would be accounted for in the 2017 UK Air Quality Plan when published, and would 17

20 be reflected in the measures that would be required to be introduced across London by local authorities and the Mayor to accelerate compliance with the EU Limit Values. As such, the Government s conclusions take into account current knowledge around the inherent uncertainties in relation to projecting future vehicle emissions To underline our commitment to deliver Heathrow Expansion without compromising the UK s ability to meet legal air quality obligations, we set out a triple lock guarantee to achieve this in three ways: i. by meeting our existing commitment to improving air quality by not increasing the amount of airport-related vehicles on the road, by supporting improved surface access that would increase the number of people (both passengers and employees) using public transport, and by encouraging and incentivising the use of new technology and cleaner vehicles. This will include new rail lines to the north, east and west of Heathrow that will be transformational and put Heathrow at the heart of an integrated transport system; ii. iii. by ensuring further measures are ready to be introduced if required to reduce traffic. Heathrow has identified a number of options available to improve air quality that can be implemented if needed as part of our expansion plans to reduce road journeys, reduce emissions and support more sustainable travel patterns. These include the introduction of a road user charge or emission-based access charge; and binding our commitment by guaranteeing that new capacity at an expanded airport will only be released when it is clear that the airport s direct contribution will not delay or cause non-compliance with the UK's legal air quality obligations We stand by those commitments and welcome the revised draft NPS particularly the change at paragraph 5.38 which adds an emissions based access charge to a list of suitable mitigation measures that could be included in our DCO application We agree with the Government's view (at paragraph 5.30 in the revised draft NPS) that "with a suitable package of policy and mitigation measures, including the modified air quality plan, the Heathrow Northwest Runway scheme would be capable of being delivered without impacting the UK's compliance with air quality limit values." Our confidence in this outcome is supported by the fact that the 2017 Plan Re- Analysis uses very conservative assumptions and reaches this conclusion despite the fact that it does not take full account of our proposed mitigation strategies, or the triple lock commitment not to release new capacity until it is clear that the airport s effect on air quality levels will not delay compliance with the UK's air quality obligations. 18

21 Defra Air Quality Plan The 2017 Air Quality Plan was published by Defra in July. This includes an assessment of future compliance with EU Limit Values, undertaken by Defra using the Pollution Climate Mapping (PCM) model. The new PCM modelling incorporates revised emission factors available from the European Environment Agency (EEA) software tool COPERT, version This section summarises the implications of the 2017 Air Quality Plan and explains the Plan's projections that roads in the Heathrow area will achieve compliance with the EU Limit Value for NO2 earlier than roads in Central London. The revised draft NPS takes account of these new projections in its conclusion that Heathrow Expansion is cable of being delivered without impacting the UK's compliance with the EU Limit Values. Scenarios Assessed As set out in the Technical Report 26 supporting the 2017 Air Quality Plan, in assessing measures to tackle NO2 concentrations, Defra considered the following three scenarios: Baseline (incorporating only the measures from the previous 2015 Air Quality Plan); Clean Air Zone (CAZ) (this scenario assumed that charging CAZs are implemented in all towns and cities where they are considered feasible and where they would bring forward compliance, including implementation of the proposed London Ultra Low Emission Zone (ULEZ)); and CAZ plus additional measures (the CAZ scenario above, but also incorporating the impact of additional actions, such as the proposed central London Zero Emission Zone, on roads still predicted to be in exceedance under the CAZ scenario) The purpose of producing these scenarios was to assess the impact of the Government s proposed measures to accelerate compliance with legal obligations regarding air quality over existing or ongoing action to improve air quality. Each of the scenarios above has therefore been assessed for each year between 2020 and As a result of the new COPERT emission factors, the projected 2017 Air Quality Plan annual mean nitrogen dioxide (NO2) concentrations are higher in all of the above scenarios than the superseded 2015 Air Quality Plan PCM results in 2020 and 2025, and generally lower in Applying the scenarios to London Road Links In the Baseline scenario set out above, for 2026, the highest concentration in London would exceed legal limits (regardless of expansion). However, this is not considered to represent a realistic scenario, since this assumes that neither 26 Defra (2017) UK Plan for tackling roadside nitrogen dioxide concentrations Technical Report 19

22 the Mayor of London s proposals for the London Ultra Low Emission Zone (ULEZ) nor any other measures beyond actions already taken or in progress would be implemented. It is in effect a do nothing scenario Based on the CAZ scenario, which assumes implementation of the proposed ULEZ as planned by the Mayor of London in 3 stages from 2019 to 2021 (and does not include consideration of the Heathrow expansion), the Greater London Agglomeration Zone (the London Zone ) would be compliant with the relevant EU Limit Value for annual mean NO2 in 2026, with the A3211 and A40 being the last road links within this zone to comply The CAZ plus Additional Measures scenario reflects the implementation of the potential London Zero Emission Zone (ZEZ). This primarily results in improved air quality at roads in Central London, bringing forward compliance of the London Zone by one year to 2025 (A12 being the last link to be compliant). Applying the scenarios to Local Road Links Projected NO2 concentrations at those PCM links in the Heathrow area, including the A312 The Parkway, A4 Bath Road, M4 and Great South West Road, are lower in the CAZ scenario and CAZ plus Additional Measures scenario (which has no effect on concentrations on these links) than the baseline scenario. These road links are projected to be compliant with the EU Limit Value earlier than road links in central London. Of the local roads, the A312 The Parkway is projected to be the last to be compliant In the baseline scenario, A312 The Parkway (north of the M4) is compliant with the EU Limit Value in However, as stated above, this is not considered to represent a realistic scenario, since this would be to assume that neither the London Ultra Low Emission Zone (ULEZ) nor any other measures beyond those proposed in the 2015 Air Quality Plan would be implemented The NO2 projections for the CAZ scenario, which is considered to account for the implementation of a realistic set of measures, indicate that the A312 The Parkway (north of the M4) would be compliant with the EU Limit Value in This remains the case in the CAZ plus Additional Measures scenario due to the limited extent of the proposed ZEZ (central London only) The 2017 Air Quality Plan projections therefore illustrate that the road links in the Heathrow area are predicted to achieve compliance with the NO2 annual mean EU Limit Value earlier than roads in Central London. They do not therefore dictate the year in which the London Zone (and therefore the UK) is compliant with the EU Limit Value, in any of the assessed scenarios For completeness, we acknowledge that the 2017 Air Quality Plan is currently subject to legal challenge. Any change to the Plan in light of such challenge can only be expected to result in further measures being taken to improve air quality, or the proposed measures being implemented more quickly than currently forecast. In either of these situations, resulting improvements to local air quality would further assist in the UK meeting its legal obligations in relation to air quality. 20

23 3.4. Further re-analysis carried out by the DfT Alongside the revised draft NPS the Government published the 2017 Plan Air Quality Re-Analysis. The purpose of this was to assess the impact of increased airport capacity on UK compliance with the EU Limit Value for annual mean NO2, taking into account (i) the revised PCM projections of future NO2 concentrations supporting the 2017 Air Quality Plan, and (ii) the DfT s new passenger demand forecasts for aviation It is important to note that this re-analysis is based on the Airports Commission modelled impacts, and adjustments to these to account for the revised passenger demand forecast. No new modelling has been completed. The 2017 Plan Re-Analysis uses the high passenger demand scenario, rather than the central scenario, so as to ensure that it provides a conservative assessment Therefore, without taking into account the full suite of mitigation measures available to Heathrow, the 2017 Plan Re-Analysis has simply scaled up the modelled Airports Commission impacts to reflect the revised demand forecasts. The subsequent Heathrow increment has then been added to the PCM projections for each of the three scenarios set out in the 2017 Air Quality Plan (the Baseline, CAZ and CAZ plus additional measures scenarios) for each year assessed ( ) The headline conclusion of the (conservative) 2017 Plan Re-Analysis is that with the implementation of actions as set out in the Air Quality Plan (i.e. based on the CAZ and the CAZ + Additional Measures Scenarios), the option does not impact on modelled compliance with limit values in any potential opening year (2026 onwards) The critical link identified as a potential risk for non-compliance is the A40 Westway (ref ) (rather than any road link closer to Heathrow). In 2026, in the 2017 Air Quality Plan CAZ scenario, after the projected impact of Heathrow expansion is taken into account, there would not be an exceedance of the EU Limit Value. Further confidence in this conclusion can be provided by the fact that the projected impact of Heathrow expansion to concentrations at this link is small, and that, as previously stated, the modelled impact does not take account of the full suite of mitigation measures available to Heathrow. In particular, the 2017 Plan Re-analysis does not take into account the measures proposed to be included in our surface access strategy 27 which are currently being developed, and will be consulted on in early The 2017 Plan Re- Analysis is therefore a 'worst case' assessment which is based on very conservative assumptions. 27 As an example, it projects +40,000 vehicles from aviation demand on the A4 in 2026 and 2040, whereas our strategy and our commitment to no more cars on the road means that this would not happen. 21

24 Uncertainty in the Air Quality Re-Analysis The 2017 Plan Re-Analysis includes a greater consideration of modelling uncertainties than in previous Airports Commission and Government analyses. In the methodology used, the risk of impacts on compliance with limit values is based upon how close the modelled baseline concentrations are to the limit value. Specifically, the assessment deems there to be a high risk of exceedance when the modelled baseline concentrations lie within 10% of the limit value Based on the CAZ scenario (considered to be the most realistic scenario for the London Zone), because the modelled concentrations are within 10% of the limit value up to 2029 (inclusive), the 2017 Plan Re-Analysis states that there is a high risk of the north west runway scheme having an impact on the compliance status of the Greater London zone prior to Whilst we acknowledge the inherent uncertainty associated with air quality modelling, as stated above, it is important to note that the projected impact of Heathrow at the key link (A40 Westway) is small and that the 2017 Plan Re- Analysis does not reflect the objective of our surface access strategy, being to expand the airport without generating any more airport related traffic on the roads compared to today. The measures we will implement to deliver this can reasonably be expected to further reduce the impact of airport expansion at the critical links and therefore reduce the risk of Heathrow expansion having an impact on the compliance status of the London zone Furthermore, and as the 2017 Plan Re-Analysis itself states: The level of risk is primarily dependent on the timing of the introduction of, and effectiveness of, actions in the Government s 2017 Plan to reduce emissions from vehicles on the wider road network, together with effective Real Driving Emissions (RDE) legislation. It is largely independent of assumptions relating to the impact of the option itself or the direct mitigation of option-related emissions. Impacts near the airport do not, in general, affect zone compliance As indicated above, we have confidence in the Mayor of London s proposals to improve air quality in London and that these will be delivered. There are also other options available to local authorities to implement the requirements of the 2017 Air Quality Plan, which are not reflected in the CAZ scenario, and which might reasonably be expected to be implemented in areas where there is a risk of non-compliance The degree of uncertainty applied in the 2017 Plan Re-Analysis and used for the purposes of sensitivity testing reflects a very precautionary approach on the part of Government and must be considered in light of the tools available to public bodies to meet their legal obligations in relation to air quality, regardless of Heathrow, as well as the mitigation measures we propose to implement, which are summarised below. 22

25 3.5. Our Proposed Mitigation Measures In Appendix 2 of our response to the draft NPS in May 2017, we provided details of the suite of mitigation measures that are available to us and the potential benefits these could deliver In the Appendix we noted that our surface access strategy will increase the uptake of public transport beyond the levels considered in the 2017 Plan Re- Analysis, and the mode-share targets in the revised draft NPS mean that we are required to deliver this. The measures proposed to be included within the surface access strategy, which will be consulted upon in early 2018, are expressly designed to take airport-related traffic off the road. We are therefore confident they will have an effect even at locations further from the airport The 2017 Plan Re-Analysis, which considers an unmitigated north west runway scheme, does not take account of our surface access strategy, and therefore presents a more pessimistic picture than is likely Measures to reduce the air quality impact of the proposed third runway will be included in the design of the scheme (this approach is known as "mitigation by design"). For example, the location of the new runway, the configuration of stands and taxiways, new and diverted road alignments, freight facilities and many other features will be designed to minimise air quality impacts as far as practicable There are certain other mitigation measures (in addition to mitigation by design) which along with our surface access strategy could be implemented, if required, to reduce air quality impacts of the north west runway scheme further. These include: i. incentivising cleaner aircraft technology; ii. iii. facilitating cleaner aircraft operations on the ground; and driving the update of cleaner airside vehicles. Vehicle Charging Schemes We welcome the change at paragraph 5.38 which adds an emissions based access charge to a list of suitable mitigation measures that could be included in our DCO application As older vehicles with higher emissions are replaced by newer ones that meet progressively tighter EU emission standards, air quality is predicted to improve. We are however exploring the potential for strategically managed access charges, low emission zones, and parking charges at Heathrow to further encourage the use of low emissions vehicles and reduce unnecessary highway travel We envisage that the focus in the early years would be on tackling the existing issues around air quality, encouraging those who drive to the airport to do so in the greenest possible vehicles. In later years, and as passenger numbers increase with expansion, it is likely that there would be a growing emphasis on discouraging unnecessary highway travel and encouraging as many people as 23

26 possible to use public transport or walk or cycle where these are viable alternatives We recognise that for some people driving is not a choice. If any charges are introduced, we would ensure that appropriate exemptions are made available to ensure that passengers who rely on their car (for instance because of reduced mobility or other disabilities) are not unfairly penalised Charges would only be introduced if they were necessary to meet specific requirements, and would be used in conjunction with our sustainable transport initiatives and investment in transport infrastructure to further support a shift away from private highway travel Summary The 2017 Plan Re-Analysis demonstrates that Heathrow Expansion would not delay compliance with the UK s legal air quality obligations. The 2017 Plan Re-Analysis represents a worst case assessment, based on very conservative assumptions, that does not take account of our mitigation strategies, including our triple lock commitment which guarantees that new capacity at an expanded airport will only be released when it is clear that the airport s effect on air quality levels will not delay compliance with the UK's legal air quality obligations. 24

27 4. Other environmental topics 4.1. Introduction We are supportive of the limited changes proposed in the revised draft NPS in relation to the principal environmental assessment principles. Our more detailed comments on these are set out in Appendix The revised draft NPS is accompanied by a number of refreshed evidence base documents and we comment on these briefly below under a series of environment topic headings Carbon Heathrow is committed to taking steps to ensure the global threat of climate change is managed. This is why we published Heathrow , our strategy for ensuring we play our part in contributing to the global targets agreed at the Paris Climate Agreement 29 to limit climate change to no more than 2 degrees centigrade (compared to pre-industrialised levels) and work towards ensuring this is no more than 1.5 degrees centigrade It is in this context that we welcome the revised draft NPS and its approach to carbon and climate change and specifically the additional detailed analysis completed by Government to examine the issue of carbon emissions. This analysis has included examining the cost effectiveness of carbon abatement options for the aviation sector to limit future UK aviation emissions 30 and updating the UK s aviation demand and CO2 forecasts The new analysis is comprehensive and detailed and importantly identifies technological and operational carbon abatement measures that are feasible and cost effective in reducing the UK s aviation emissions consistent with the UK's climate change obligations and the planning assumption proposed by the Committee on Climate Change (CCC) to keep UK aviation emissions at 2005 levels by The carbon abatement analysis and CO2 forecasts have also fed into the Government s updated appraisal 33 which continues to demonstrate that irrespective of future scenarios on the management of carbon 34, the economic 28 See 29 See 30 Carbon Abatement in UK Aviation, Final Report, prepared by Ricardo for the Department for Transport (ref CCCC16B03/CCCC16B05, 17 th October Forecasts, Department for Transport, October Scope of carbon budgets: Statutory advice on inclusion of international aviation and shipping, Committee on Climate Change, April Updated Appraisal Report, Airport Capacity in the South East, Department for Transport, October The Airports Commission and Department for Transport have considered two future scenarios. Carbon Traded where UK aviation is part of a global emission trading system and Carbon Capped where carbon emissions are capped to meet the CCC s planning assumption 25

28 and strategic benefits of the Heathrow north west runway are greater than those from other options considered The new analysis that has been completed in preparing the revised draft NPS therefore provides additional assurance on the conclusions reached previously by the Airports Commission that expanding capacity at Heathrow through the north west runway is consistent with the UK s climate change obligations In this respect, we therefore agree with the Government s conclusions as stated in paragraphs 3.66 and 3.67 of the revised draft NPS, reproduced below; 3.66 The further analysis also shows that, in both carbon policy scenarios, the Heathrow Northwest Runway scheme would deliver significant benefits to passengers and the wider economy (such as lower fares, improved frequency and higher productivity), and would do so more quickly than the Gatwick Second Runway scheme. Both Heathrow schemes provide more passenger benefits by 2050 than the Gatwick Second Runway scheme The Government has considered this further analysis, and concludes both that expansion via a Northwest Runway at Heathrow Airport (as its preferred scheme) can be delivered within the UK s carbon obligations, and that the scheme is the right choice on economic and strategic grounds regardless of the future regime to deal with emissions from international aviation It is clear, therefore, that the economic and strategic benefits of expanding hub capacity at Heathrow are consistent with meeting UK climate change obligations but also importantly ensure that the hub capacity needed to maintain long-haul connectivity, for which no alternatives exist, is prioritised in a carbon constrained world Whilst we agree with the Government s analysis, we are not complacent and are, therefore, taking steps to ensure that carbon efficiency sits at the heart of our work to prepare a DCO application for our expanded Heathrow Masterplan We agree with the Government s view that carbon emissions of airport development can be classified into four key categories i) from aircraft, ii) from infrastructure and ground operations, iii) from transportation, and iv) from construction. We are developing strategies to limit emissions in each of these areas consistent with our degree of control and influence In terms of aircraft emissions, we are supportive of Government policy to manage these emissions globally and are committed to the recently agreed ICAO agreement CORSIA 35 that will cap net global aviation emissions at 2020 levels Alongside this global commitment, we have an aspiration to ensure that aircraft carbon emissions do not increase in net terms from the opening of a third runway. Supporting this aspiration, we are committed to providing green 35 Carbon Offsetting and Reduction Scheme for International Aviation is the global agreement reached by ICAO in October 2016 to offset any growth in global carbon emissions from aviation from

29 incentives to airlines aimed at accelerating the uptake of newer, more carbon efficient aircraft and operational practices, as well as incentivising and working with partners to increase the supply and take up of sustainable aviation biofuel at Heathrow Specifically, we note the important role we can play in encouraging the uptake of carbon reducing operational practices such as the use of single engine taxiing procedures identified in the carbon abatement report 36 published alongside the revised draft NPS. In this respect, we already encourage our airlines to adopt this practice and have recently updated our Aeronautical Information Publication to provide additional guidance and to encourage airlines to adopt this practice at Heathrow. This work provides a firm foundation to realise additional benefits as we develop our approach and strategies going forward Our goal for operational emissions is for our infrastructure to be zero carbon by 2050, and we have already taken steps to offset all carbon emissions from our energy use, including the purchasing of renewable tariff electricity Our surface access strategy aims to limit carbon emissions by investing in lower carbon transport as well as providing incentives to encourage passengers and employees to adopt lower carbon travel alternatives to Heathrow. On construction, our ambition is to adopt best practice principles to limit the carbon from constructing the new infrastructure, including optimising the use of rail for the transport of construction components and materials Against this background, however, it is important that the final NPS is clear about the scope for the examination in relation to these matters. We support the proposition that our carbon strategy is examined and tested in the context of the DCO application for the north west runway scheme. However, the NPS should be clearer that the DCO examination is not an examination of the Government s carbon and climate change policy or of other matters outside of our control We recognise that carbon and climate change are important issues in the context of scheme development, construction and operation. The revised draft NPS requires Heathrow to provide evidence of the carbon impact of the north west runway (including embodied carbon), both from construction and operation, so that the scheme can be assessed against the Government's carbon obligations, including but not limited to carbon budgets We will supplement the environmental assessments published with the NPS by completing our own Environmental Impact Assessment of our scheme proposals. We will consult communities and stakeholders on preliminary environmental information and our DCO application will be accompanied by an environmental statement which will demonstrate how our proposals meet the requirements of the NPS in relation to carbon emissions and climate change. 36 Carbon Abatement in UK Aviation, Final Report, prepared by Ricardo for the Department for Transport (ref CCCC16B03/CCCC16B05, 17 th October

30 4.3. Noise Heathrow is one of the world s leading airports in noise management and has a proven track record in delivering improvements in the noise climate, which dates back to the 1970s. Even though the number of flights has increased significantly since then, Heathrow s noise footprint has continually reduced The Airports Commission s Final Report notes that the north west runway scheme is expected to generally deliver a reduction in noise impacts 38, which supports our own assessment that the overall number of people exposed to noise will be lower with an expanded Heathrow compared to today We have carefully reviewed the following documents alongside the revised draft NPS: Appraisal of Sustainability annex 5 noise, including supporting demand and fleet forecasts; UK Airspace Policy Policy Paper; and Air Navigation Guidance We note the work which has been done to co-ordinate these documents and we welcome the clarity that has been brought, for instance, by the Policy Paper and the Air Navigation Guidance that make clear the Government s approach to aviation noise policy. Policy in this area will also continue to evolve There have been some small but helpful changes to the assessment principles for noise set out in the revised draft NPS. In particular, we welcome: i. the increased clarity about the relative roles of the DCO and Airspace Change processes (paragraphs supported by revisions to paragraphs ), although as our detailed comments in Appendix 1 elaborate some further clarity around the sequential timing of the DCO and Airspace Change processes would be helpful; ii. the clarity provided by the direct reference in paragraph 5.52 to the noise assessment principles set out in the emerging national policy on airspace being relevant to the consideration of the DCO application; iii. the clarification of the role allocated to the Independent Commission on Civil Aviation Noise (paragraphs ); and iv. the addition to paragraph 5.61, which expects the applicant to make particular efforts to incentivise the use of the quietest aircraft at night The revised Appraisal of Sustainability includes re-calculated noise contours for the north west runway taking account of revised passenger forecasts and other considerations. It is helpful that the revised draft NPS has refreshed its 37 Managing Aviation Noise CAP1165, Civil Aviation Authority (2014). Figure 2.1 presents the noise reduction since Airports Commission Final Report, paragraph e.g. 55dBLden, in

31 evidence base and confirms its support for the north west runway with the benefit of these further assessments For our part, we consider that the revised noise contours may represent a worst-case assumption built as they are on the DfT s assumption that the airport may achieve 753,000 ATMs by 2030 and, therefore, before some aircraft types can be phased out. As previously noted, this is a significantly faster rate of growth than that modelled for the Airports Commission and somewhat faster than we expect to achieve in practice To support our DCO we will provide a full environmental impact assessment, following the approach set out in the revised draft NPS, to assess the likely significant effects of a three runway Heathrow. This will adopt indicative flight paths informed by the work being undertaken for the separate airspace change process, which includes extensive consultation. That work will be based upon a delivery programme and design years for the north west runway which will need to be established for the DCO with refreshed forecasts, taking into account proposals for the phased growth of capacity and the latest projections for future aircraft fleet performance We will also consider the beneficial impact of proposed mitigation measures, including noise insulation, incentivising the use of quieter aircraft, the plans for a noise envelope and a ban on scheduled night flights. On that basis, we are confident that our DCO application will be able to satisfy the noise assessment principles set out in the draft NPS Surface Access Our principal comments on the drafting of the surface access section of the revised draft NPS are set out in Appendix 1 which addresses the detailed wording of some paragraphs. We welcome the limited changes to the surface access provisions of the draft NPS We noted in our submission to the draft NPS consultation in May 2017 that a reference to road user charging would be a helpful inclusion in the NPS. In particular, we noted that road user charges could be one of the measures to be considered within a multi-faceted surface access strategy to help manage demand by car users and meet the requirements of the NPS. We reiterate this comment and consider it is important that the NPS acknowledges the potential role that road user charges could play as part of the surface access strategy. Appendix 1 contains our suggestion for the drafting of paragraph 5.17 to address this point We therefore also welcome, as noted earlier, the recognition at paragraph 5.38 that an emissions-based access charge may be an appropriate mitigation measure as part of the surface access strategy to help to achieve NPS objectives in relation to both transport and air quality. The potential need for and nature of any such charge will be considered in detail as part of the development of our DCO proposals. 29

32 We reiterate that we are committed to paying our fair share towards transport changes and improvements required to enable Heathrow s expansion to be delivered 40, but there is an important role for Government where such improvements deliver wider connectivity and economic benefits and where improvements are not required to enable the north west runway to operate Western and Southern Rail Access to Heathrow are both transport infrastructure projects in the national interest that will deliver significant improvements in local and regional connectivity and reinforce Heathrow s position at the heart of a truly integrated transport network. We are aware that Network Rail is advancing Western Rail Access through the preparation of a separate DCO application, but progress has been slow in bringing forward Southern Rail Access despite a very strong initial business case. It would be helpful if the NPS reaffirmed the Government s support for these projects and the need to bring them forward at the earliest opportunity, recognising the importance of integrating such projects into our expansion proposals and delivering a properly integrated transport system We are making good progress in developing our traffic models to support the assessment of the traffic impacts of the north west runway and are engaging closely with the relevant highway, traffic and local authorities as we develop detailed proposals for consultation Habitats Regulations Assessment (HRA) We remain confident, as indicated in our response to the consultation on the draft NPS published in May 2017 (see Appendix 3 of that response in particular), that the project-level HRA will in due course confirm that Heathrow expansion can be delivered without an adverse effect on the integrity of European sites The project design and assessment process is ongoing but the emerging information and analysis, when added to the existing evidence considered in the revised HRA for the revised draft NPS, continues to suggest this is the likely outcome for the project-level HRA. Appendix 2 to this response sets out some additional information and professional evaluation which adds to our confidence in reaching this position Though we remain confident in our view outlined above, we recognise at this stage that the plan-level HRA for the revised draft NPS is based on high level data and as such cannot discount adverse effects on integrity from any of the short-listed schemes. The HRA must therefore address the requirements of Article 6(4) of the Habitats Directive and we agree with its conclusions For example, the predictions of future traffic numbers used to inform the Airports Commission assessment of the three short-listed schemes used existing traffic models that were not created specifically to address airport expansion related issues. These models used parameters based on historic 40 Subject to meeting the CAA s regulatory policy on surface access contributions 30

33 baseline data and broad assumptions regarding outline scheme descriptions and construction schedules. Further traffic modelling, based on detailed masterplans, updated passenger forecasts and construction programme detail is required to identify whether any, and if so which, European sites should be screened in for appropriate assessment at project level. Article 6(4) Considerations We set out in our response to the consultation on the draft NPS published in May 2017 why we believe Heathrow expansion is the best and indeed the only way of fully addressing the identified need for increased airport capacity in the South East of England by 2030, that is to say, hub airport capacity. The refreshed evidence base reinforces that conclusion for the reasons set out in section 2 of this response It therefore remains our view that it is possible to conclude that the other shortlisted schemes are not alternatives. This is because neither of the other shortlisted schemes (i) can fully deliver the objectives of the Airports NPS to increase airport capacity in the South East and maintain the UK's hub status and/or (ii) can be considered, on current evidence, less damaging for European site(s) as set out in the revised HRA In particular, we note the conclusion at paragraph 3.19 of the revised draft NPS, that London Gatwick Second Runway (LGW-2R) scheme would not enhance, and would consequently threaten, the UK's hub status. This is important because the first step in applying Article 6(4) and in the consideration of alternatives, involves the competent authority identifying the objectives of the plan or project, as that will frame the consideration of alternatives. Alternative solutions are limited to those which are feasible 41 and which deliver the same overall objective as the preferred scheme We therefore welcome the overall conclusion of the revised draft NPS at paragraph 1.30 that neither of the other short-listed schemes is an alternative solution While we do not consider it should ultimately be necessary to consider Article 6(4) for the project-level HRA, we nevertheless also welcome the clearly articulated confirmation, within the revised draft NPS (again at paragraph 1.30), that the needs case for increased capacity and maintaining the UK's hub status constitute imperative reasons of overriding public interest (IROPI), and that this will be relevant to determining at the application stage whether there are alternative solutions and IROPI. 41 The term "feasible" is now commonly used in some UK and EU guidance. For example, see paragraph 10 of Defra's 2012 guidance and the second paragraph of section of the EC clarification guidance: Clarification of the concepts of: Alternative solutions, imperative reasons of overriding public interest, compensatory measures, overall coherence, opinion of the commission, January Paragraph 11 of Defra's guidance: Habitats and Wild Bird Directives: guidance on the application of article 6(4), December 2012 and section of the EC's Methodological guidance on the provisions of Article 6(3) and (4) of the Habitats Directive 92/43/EEC, November

34 We therefore welcome the overall conclusions of the revised draft NPS in respect of Article 6(4). Even if it is ultimately not possible to discount adverse effects on integrity for all European sites, a similar positive conclusion should be the outcome of any application of Article 6(4) in the context of the project-level HRA. On that basis, we can be confident that effects on European sites should not preclude a DCO from being granted for the preferred scheme Summary Carbon. The economic and strategic benefits of expanding Heathrow are consistent with meeting the UK s climate change obligations and hub capacity shall be prioritised in a carbon constrained world. Noise. We are confident that our DCO application will be able to satisfy the noise assessment principles set out in the draft NPS. Surface Access. The NPS should reaffirm the Government s policy support for transport infrastructure projects which will deliver wider connectivity and economic benefits, and the promotion of these at the earliest opportunity (specifically Western Rail Access and Southern Rail Access). HRA. We remain confident, as indicated in our response to the consultation on the draft NPS published in May 2017, that the project-level HRA will in due course confirm that Heathrow expansion can be delivered without an adverse effect on the integrity of European sites. 32

35 5. Other matters arising from the revised draft NPS 5.1. Introduction Since the Government s announcement on 25 October 2016 that a north west runway at Heathrow, combined with a significant package of supporting measures, is its preferred scheme to deliver airport capacity in the South East of England, we have mobilised a very substantial project team with the aim of developing, consulting on and then preparing an application for a development consent order (DCO) We have engaged with stakeholders on our scheme development process which will optimise the project against economic, affordability, operational and connectivity objectives whilst limiting, mitigating and compensating for its environmental effects. Stakeholder and community engagement is central to this process and our teams have been busy preparing material for our first DCO consultation, so that the communities around Heathrow can have a genuine say in our plans We are pleased to be able to provide an update on a number of issues arising from the revised draft NPS Crossing the M One key element of the deliverability of the new runway raised by some stakeholders in their representations on the first draft NPS related to the practicality and cost of the runway crossing the M Throughout 2017, we have been considering carefully the length and location of the proposed new runway and our analysis has concluded that a full-length runway located to the west of Sipson and crossing the M25 is the best option to deliver the benefits of an expanded Heathrow whilst minimising environmental and community impacts. Importantly, that work has validated the conclusions drawn by the Airports Commission The original scheme anticipated in the Airports Commission's Final Report outlined a western diversion of the M25 with the runway crossing the motorway on a bridged and tunnelled structure. The location of the structure is sufficiently southwards to not require any intervention at the M25 Junction 15 itself. Major airports with runways crossing major roads are not uncommon. Crossing the M25 with a runway may be a first for the UK, but runways have been built over busy roads at many airports around the world, including Charles de Gaulle (Paris), Schiphol (Amsterdam), and at Fort Lauderdale (USA) The work on the new section of the M25 would be undertaken off-line, so operation of the current M25 would not be affected. Only when the new section had been completed would it be connected to the existing motorway. Once the bridged and tunnelled structures had been built, the runway and earthworks would be completed We have had considerable engagement with Highways England and the current maintenance operator for this section of the M25, ConnectPlus, to review these 33

36 proposals, both in terms of construction and impact on the operation of this critical road network, to identify opportunities to improve them further. That engagement will continue throughout the DCO process and beyond into the implementation phase and we are confident that Highways England and ConnectPlus will conclude that our proposed approach is appropriate Affordability and Financeability At the same time, detailed construction and engineering studies have been undertaken to verify both the robustness of the approach and its potential costs. Working closely with our airline partners we have made good progress in identifying ways to deliver expansion while maintaining airport charges per passenger close to current levels in real terms The revised draft NPS challenges Heathrow to demonstrate in our DCO application that the north west runway scheme is cost-efficient and sustainable, and seeks to minimise costs to airlines, passengers and freight owners over its lifetime 43. Alongside other key considerations such as airport operations, sustainability, environmental and community effects, cost and affordability have been two of our principal measures for evaluating our scheme options. This work is giving increasing confidence that the expansion project can be delivered whilst maintaining airport landing charges close to current levels, as required by the Secretary of State Scheme Promoter One notable aspect of the revised draft NPS is the change proposed at paragraph 1.15, which states in this additional sentence: For the avoidance of doubt, the Airports NPS does not identify any statutory undertaker as the appropriate person or appropriate persons to carry out the preferred scheme We do have concerns about the implications of this addition and we believe that it would be helpful and provide confidence to both investors and those affected by Heathrow Expansion if the NPS confirmed Heathrow Airport as the appropriate promoter of the project. We believe that there are a number of reasons why this is important: a) the NPS will set environmental objectives for an expanded airport on issues such as air quality, noise and surface access mode share that could only be delivered / complied with by a single airport operator; b) the NPS will be seeking to provide certainty for communities and landowners about commitments that have already been given by Heathrow Airport on issues ranging from land acquisition to air quality and noise mitigation that would not be binding on another promoter; 43 Revised draft NPS para

37 c) bearing in mind the scale of financial commitment that will be needed to undertake the project, the NPS should be doing everything it can to provide certainty to the airport operator and investors that the NPS sees Heathrow Airport as the promoter; d) the NPS should not cause confusion about who is liable for valid statutory blight claims on designation of the NPS; and e) there would be obvious and highly challenging practical difficulties for a different promoter to apply for, construct and then operate a part of the airport, including one of its three runways, part of its taxiway system, one of its terminals, part of its surface access network and so on and, indeed, there is no precedent for the core infrastructure of an airport to be constructed or operated separately The clear need identified by the Airports Commission and in the revised draft NPS is for hub capacity. Given the issues set out above, it is difficult to envisage how an expanded hub airport could function effectively in circumstances where the expansion element is the responsibility of a different promoter The national importance of the north west runway is such that the NPS should not inadvertently create any unnecessary risk of confusion or delay. It would assist the funding and delivery of the north west runway if the basis for its promotion and delivery was clear within the NPS For this reason, we suggest that Heathrow Airport should be identified as the only plausible promoter of the north west runway. Failing that, we consider that it would be important in the public interest for the NPS to set out clearly the criteria that any DCO applicant would need to satisfy in the course of promoting their DCO application including its examination. It would fall to the Secretary of State for Transport, as part of the process of determining the DCO application, and taking into account the advice and recommendations of the panel of examining inspectors who examined the application, to consider whether those criteria had been satisfied The criteria could be expected to be focused around the following: i. the promoter s experience, resources and capacity to deliver the scheme, to comply with all NPS requirements, and to honour all commitments given in relation to expansion including during the DCO process; ii. the promoter s ability to finance and fund the scheme, including meeting all statutory blight obligations; iii. the effect of construction of the scheme on the existing operating airport; and iv. use, ownership and control of land required for the scheme The criteria would have as their underlying objective the requirement for the promoter to demonstrate that: 35

38 5.5. Runway a. it has sufficient control of the entirety of Heathrow Airport to be able to deliver the fundamental reconfiguration of the existing airport that successful expansion will require; b. it can deliver a sufficiently integrated expanded airport so that the essential characteristic of a hub airport is maintained; and c. it can utilise sufficient landing charges across the entire airport to fund expansion The Planning Act 2008 requires any DCO application to be determined in accordance with the relevant NPS, except in very limited circumstances. The precise wording of the NPS, therefore, is important to the delivery of nationally significant infrastructure The revised draft NPS states that the NPS will have effect in relation to a runway length of at least 3,500m, and enabling at least 260,000 additional ATMs per annum (paragraph 1.15). To be compliant with the NPS, these elements are expected to be comprised in the design of the scheme (paragraph 1.17) In our representations in May 2017 we suggested that, rather than specifying a minimum runway length, the NPS should instead require that the new runway be of sufficient length to deliver the specification set out in the footnote to the NPS. That footnote explains that the NPS stipulates the length of the new runway as at least 3,500m to ensure that the new infrastructure can accommodate the largest commercial aircraft, as they operate many of the longhaul flights that support the UK s position as a major aviation hub. The revised draft NPS, however, does not make the change that we suggested We recognise and accept that it is for the NPS to specify the need that it expects the new infrastructure to meet and that it is important for the NPS to be consistent with its evidence base. In that latter respect, our own submissions to the Airports Commission and the report of the Airports Commission itself both assume a 3,500m runway (there is no reference to at least ). It is also apparent that the references to the runway length comprised a high level description of the runway and it had always been our intention to model and optimise the runway length as part of the DCO process, as we are currently doing We take that approach to be consistent with the evidence base, the NPS generally and the principles of the DCO process. For example: a) Examination of the AoS published with the draft and revised draft NPS identifies that the precise DCO scheme is expected to be refined through the pre-application process. Paragraph of the AoS refers to refinements which were not captured by the Airports Commission s appraisals, but have been developed since by us - and also to the expectation that during further stages of detailed design, further variations are expected in order to continue to mitigate negative 36

39 environmental and social effects. The same point is made at paragraph of the AoS which provides: As the design of a preferred scheme progresses subsequent to the draft NPS, further variation (SIC) of the scheme design are anticipated. These may seek to avoid, reduce or off-set negative impacts and enhance positive impacts and would be assessed through the EIA process. b) This is consistent with the conclusions of the Airports Commission who made it clear that the scheme to be advanced should evolve through the planning process: It should be noted that any of the plans described below would need to be subject to more detailed design and environmental assessment, and further public consultation, to prepare for planning consent. In preparation for the planning process, the private sector promoter will want to engage with communities, local authorities and other stakeholders including airlines as it finalises its masterplan c) Similarly, the revised draft NPS confirms that it is not the intention of the NPS to limit variations resulting in the final scheme for which development consent is sought. The form of a development for which an application is made is a matter for the applicant. The NPS does not prejudice the viability or merits of any particular application, detailed scheme or applicant (revised draft NPS paragraph 4.11) The detailed work which we advised in our May 2017 submission is continuing. Modelling is being undertaken taking into account a wide range of factors including: i. Aircraft performance characteristics; ii. iii. iv. Landing and take-off weights including fuel, passenger, baggage and cargo; Runway elevation above sea level; Air temperature range, taking account of climate change forecasts; v. Strength and direction of the wind (including frequency); vi. Average runway gradient along the runway length; vii. Surface condition of the runway, including all weather conditions; and viii. The long or short-haul nature of the flight As part of this process, we are engaging closely with NATS and with the Airline Working Group to test all issues from a technical and operational perspective. No party has any interest in achieving other than the full capacity of the runway required by the NPS. 44 Airports Commission final report (2015) paragraphs 5.1 and

40 Our work on this issue is not yet fully complete and further consultation, engagement, design development and assessment is necessary before we can determine the precise runway length. There remains a possibility, therefore, that potential benefits could be achieved from a slightly different runway length, whilst still meeting the performance requirements set out in the revised draft NPS Given the recognition in both the final report of the Airports Commission and in the Appraisal of Sustainability of the desirability of further design development, including as a result of community and other consultation, we consider that providing some flexibility on the specification of the precise runway length would not undermine the NPS and its objectives Accordingly, we suggest in Appendix 1 to this response that a revised wording be adopted in key paragraphs in the NPS, broadly as follows: The policies in the Airports NPS will have effect in relation to the Government s preferred scheme, having a runway length of at least approximately 3,500m and enabling at least 260,000 additional air transport movements per annum, accommodating the largest commercial aircraft and providing equivalent operational performance as to the two existing runways at Heathrow Airport, or such other length of runway as satisfies these conditions The role of the Annexes We think there may be scope for some confusion about the role of the Annexes in the draft and revised draft NPS. There is the potential for public perception to consider the red line boundary in Annex A to prescribe the limit of any DCO application, although that is obviously not its intention. That risk is enhanced by the wording of paragraph 4.3 of the revised draft NPS which states that the NPS applies to schemes in the area shown within the illustrative scheme boundary map at Annex A. The risk of confusion may be compounded by the following: i. the boundary shown in Annex A is stated to be illustrative, raising questions about its precision; and ii. a red line is commonly understood to be a planning application boundary a different colour (or no colour) might be more appropriate An illustrative masterplan is shown in Annex B and referred to in paragraph 4.11 without explanation. That masterplan is a plan that was submitted by Heathrow to the Airports Commission and it should be noted that: i. the red line boundary in Annex B is different from the boundary in Annex A; ii. the illustrative masterplan in Annex B also shows significant development beyond the red line boundary shown in Annex A for example, development associated with works to limit flood risk, landscaping and open space, as well as significant works to the M25; and 38

41 iii. it is apparent from paragraphs 1.15, 1.17, 1.38, 1.39 and 4.11 that the NPS would apply to any DCO application for a north west runway at Heathrow (without reference to whether or not if falls within the red line) Having noted the amendment to paragraph of the revised draft NPS, we understand that the primary purpose of the red line is to establish an area for statutory blight purposes, where blight would arise on the designation of the NPS. The statutory blight provisions apply where an NPS has identified land as suitable or potentially suitable for a nationally significant infrastructure project. Any additional blight obligation would fall on the promoter in the event that a DCO was granted for a north west runway scheme with a different footprint. The NPS could be clearer in this respect Whilst we recognise that the NPS will need to identify land as suitable or potentially suitable for the north west runway project in the context of statutory blight, clearly that does not preclude additional land also being developed for that purpose; that is a matter for the DCO application. We recognise and support the principle that the red line is illustrative. The design for the north west runway project will have in mind the illustrative boundary in Annex A of the NPS, but will be developed to provide the optimal solution having regard to a range of factors, including in particular, stakeholder and community consultation feedback and environmental impact assessment Thus, during consultation, we will want to hear views about the following: i. the extent of river diversions and flood alleviation works that may be necessary in the Colne Valley; ii. the extent of green infrastructure, landscaping and biodiversity enhancement that may be necessary or desirable as a result of the nature conservation policies of the NPS; and iii. the extent of associated development (offices, hotels, cargo, etc.) that it may be desirable to include within a DCO application In this regard, we think that the NPS should be clearer about the status of the Annex A and Annex B illustrative red line boundaries. This could include using a different colour to avoid confusion with any potential planning boundary for the scheme In Appendix 1 we suggest limited changes to the text of the revised draft NPS on these matters Associated Development We are concerned that the revised draft NPS does not sufficiently recognise the wider land use requirement and effects of the north west runway. We explained our concerns at some length in our response to the draft NPS in May (in response to Questions 3 and 6). We feel that the NPS could be clearer on this issue The construction and operation of the north west runway scheme will have a wide range of land use impacts, the principles of which are already well known 39

42 and should be reflected in the NPS for the benefit of clarity and public understanding. The NPS should particularly recognise that significant associated development will be required to support the construction, operation and mitigation of the north west runway. This could include development ranging from temporary construction works and facilities, airport support facilities (e.g. fuel storage, water treatment, cargo, maintenance), airport-related development (e.g. hotels, offices, warehousing) and mitigation works (e.g. diverted roads and rivers, landscape enhancements), to the potential replacement of facilities displaced by the footprint of the expanded airport The illustrative Annex B masterplan does identify some provision for supporting and other airport-related development but the lack of reference to such development in the revised draft NPS and the potentially unclear status of the Annexes could create some uncertainty or confusion. It is therefore important in our view that the NPS sets an appropriate expectation that a range of associated development will form part of the DCO application. We offer suggested text in this regard at Appendix Green Belt We entirely accept the importance of Green Belt policies and we fully expect the NPS to reflect national Green Belt policy consistent with the policies set out in the National Planning Policy Framework (NPPF). There are, however, two aspects of the revised draft NPS which we would invite the Government to reexamine prior to designation of the NPS. The first relates to the expectation that it will be necessary for the Secretary of State to find very special circumstances to justify inappropriate development in the Green Belt (namely the north west runway scheme) and that the Secretary of State will attach substantial weight to the harm to the Green Belt when considering any application for such development. We agree that this is an accurate formulation of national Green Belt policy We suggest, however, that this wording does not sufficiently take into account the fact that very special circumstances have already been identified. Indeed, the circumstances could hardly be more special than direct Government support for a north west runway at Heathrow to maintain the UK s hub status. Almost uniquely, the scheme is the subject of its own dedicated national policy statement. It is forecast to generate significant economic benefits for the UK and will be the first new runway in the south of England for 50 years. In principle, very special circumstances are established. A more practical application of the policy would be only to require very special circumstances to be demonstrated for any elements of the project proposed outside the illustrative red line boundary set out in Annex A of the revised draft NPS the land that the NPS has itself identified as suitable or potentially suitable More importantly, paragraph of the revised draft NPS then sets out the following: The Secretary of State may require the provision of replacement Green Belt land, which should be secured by the applicant.. 40

43 If this sentence was retained in the NPS it would create a number of practical difficulties for the applicant and the decision-maker including: i. the fact that the Secretary of State may have such a requirement provides no guidance to the applicant or the Examining Authority as to whether such a provision is necessary nor of the terms by which the Secretary of State may consider its necessity; ii. there is no practical means of providing replacement Green Belt land. Green Belt land is by definition open and between existing settlements. The only practical means of creating additional open land between settlements may well be to demolish pre-existing development, which presumably is not the intention of the NPS; iii. Heathrow has no power to designate land as Green Belt. The NPPF makes clear that Green Belt can only be designated through local plans and Heathrow has no local plan-making power; and iv. we are not aware of any requirement in any other national planning policy (or local policy) that an applicant should provide new Green Belt land presumably because of the impracticality of doing so We recognise, however, that the development of the north west runway is exceptional, with significant impacts on the Green Belt which may only be consented in the national interest, and that an exceptional policy response may be appropriate. We are ready to play our part as far as practicable in meeting the Government s objectives but we are concerned about our inability to do so without the assistance of others We respectfully suggest that this requirement is clarified given the potential difficulties in achieving it Role of the Civil Aviation Authority in the DCO process The CAA is Heathrow Airport s economic regulator, is responsible for civil aviation safety matters and also oversees the airspace change process that will need to be gone through before the north west runway opens. Those three groups of statutory functions are distinct from the DCO process The revised draft NPS provides increased clarity about the relative roles of the DCO and Airspace Change processes 45. It also contains commentary on the CAA's role in relation to national security 46] and noise 47 aspects The revised draft NPS is also clear that key elements of the CAA's economic remit, not least cost and affordability, are going to be important considerations as part of the examination and determination of any DCO application for the north west runway. Reinforcing this, under current regulations the CAA will be a statutory consultee in relation to the DCO application. 45 Paragraphs Paragraphs 4.59, 4.61, 4.64 and Paragraphs 5.49, 5.64 and

44 For this reason, we think it would assist all parties, including the public, if the NPS was clearer and gave guidance on how and when the CAA should engage in the DCO process as a statutory consultee. It is clearly important for it to do so in order that matters relating to its functions and relevant to the DCO can be raised and considered by all concerned during the process, including members of the public, but in a way that maintains the CAA s independence and the integrity of its exercise of these functions Safety Ensuring that planes take off and land safely is fundamental to the design of a third runway at Heathrow. To date, we have undertaken a number of operational and safety studies whilst developing our proposals for a third runway, including specific analysis in relation to taxiing between the runways. This work has confirmed that a third runway would be capable of delivering the proposed additional capacity at Heathrow (at least 740,000 ATMs per year across the airport) whilst operating safely and has informed the design of our proposals The design and layout of our proposals for a three runway Heathrow should evolve through a full process of engagement, consultation, environmental appraisal and scheme design. For example, we are consulting on options and principles as part of our first stage of public consultation in early 2018, and the responses we receive will inform the development of our proposals Operational and safety assessment work will continue to be a critical part of the design process to ensure that our final proposals are capable of effective and safe operation, principles which we will need to demonstrate robustly during the examination of our application for development consent Domestic Connectivity Heathrow is committed to playing its part in boosting domestic air connections to the airport and we have already acted by reducing departing passenger charges on domestic routes by 10 in 2017 (>33% decrease vs 2016). We will increase this discount to 15 in 2018 (>50% decrease vs 2016). We have also proposed a 10m route development fund to support airlines that want to fly new domestic routes once new capacity is available We have a track record of supporting domestic connectivity, including working with Chambers of Commerce across the UK to support domestic businesses through free advertising; the instigation of our national connectivity task force; and participation in voluntary changes. Our actions have reduced a decline in domestic routes from Heathrow, supported a number of new routes and increased competition on others Our representations to the initial draft NPS in relation to domestic connectivity have been helpfully responded to in the revised draft NPS. We are fully committed to driving an increase in the number of UK airports with connections into Heathrow and stand by the commitments we have made to facilitate improved connectivity. We had expressed some concern previously, however, 42

45 that the draft NPS expected Heathrow to guarantee the provision of domestic routes to a named list of UK airports 48. As an airport operator, Heathrow has limited control over how slots are used by airlines. We support the principle of ring-fencing capacity at an expanded Heathrow for domestic use (if changes to regulation post-brexit made this possible) but we asked in our May 2017 response to the draft NPS consultation that the list of routes in the draft NPS be indicative to better reflect the current constraints. The revised draft NPS now makes clear 49 that the listed routes are examples of potential domestic routes We also asked that the Government should recognise the role it has to play in designating Public Service Obligation routes (PSOs), the only available mechanism at present to guarantee routes. We have worked to support the Government in this, through charging, the route development fund, and by identifying the means by which to ringfence routes. The revised draft NPS, however, is still silent on the Government s role in relation to safeguarding domestic connectivity and the use of PSOs As highlighted in our May 2017 response to the draft NPS consultation (para and of our original response), we support a solution that provides long-term certainty of a connection to Heathrow for an appropriate number of domestic destinations. The DfT is right to recognise that any domestic routes are first and foremost a commercial decision for airlines. This choice can be influenced by the airport operator but is predominantly influenced by the levers available through Government. As such, we recommend that: a. Government should recognise the support that Heathrow has already outlined (discounted domestic passenger charges and a 10m route development fund, outlined in para of our original consultation response) and that Heathrow should be accountable for those commitments. b. Government should recognise that it too has a role in influencing the commercial decisions of airlines, predominantly through Public Service Obligations and, out with those routes, the levels at which it levies Air Passenger Duty on journeys between two UK airports. c. The DfT s role is not to hold Heathrow to account (para 3.34, revised draft of NPS) on new routes being introduced but to hold Heathrow to account for the support it has pledged. It is for the DfT to use its wider National Aviation Strategy to outline how it can support those new routes We are also of the view that the expectations set by the revised draft NPS on domestic connectivity ( Government expectation on domestic connectivity section, para 3.34 onwards) are too narrow to realise the opportunity of Heathrow expansion for domestic connectivity. The opportunity is not just to 48 Paragraph Paragraph

46 connect new routes by 2030 but to (a) give certainty of connectivity beyond 2030 and (b) to encourage where possible improved domestic routes for those destinations already connected including realising the opportunity of competition Achieving increased domestic connectivity will require cooperation between our role as airport operator and that of Government. On this basis, we suggest that: Summary a. Paragraph 3.34 of the revised draft of the NPS (titled Government expectations on domestic connectivity ) is expanded to encompass the need to provide long-term certainty for an appropriate number of domestic routes and improve those routes already connected today. b. The NPS recognises that it is appropriate for government to support (a) the use of the National Aviation Strategy to set out measures for reserving slots and (b) the effective use of those slots to ensure that increased domestic connectivity is achieved and maintained (e.g. using PSOs to support specific UK connections). c. The NPS reflects that airline competition on domestic routes is valued by UK domestic passengers and UK-wide stakeholders and that government has a role in ensuring that major UK domestic operators can enter an expanded Heathrow at scale through its review of slot release as part of the National Aviation Strategy. Scheme Promoter. We recommend that the NPS identifies Heathrow Airport as the only plausible promoter of the north west runway. In the absence of this, the NPS should set out clearly the criteria any applicant should meet in bringing forward the delivery of the scheme. Runway Length. We recommend that the NPS recognises that it may be acceptable to develop a runway slightly longer or shorter than 3,500m if it can be demonstrated that such a runway still meets all of the capacity and capability requirements of the NPS. Annexes A and B to the draft NPS. We recommend that the NPS is revised to explain more clearly the relationship between the land identified for statutory blight purposes as suitable or potentially suitable for the north west runway project and that which may legitimately be proposed within the DCO application as a result of detailed assessment, scheme development and stakeholder consultation. The NPS should recognise that significant associated development will be required to support the construction, operation and mitigation of the north west runway. Green Belt. We recommend that the NPS removes the requirement for the applicant to secure the replacement of Green Belt land. Role of the CAA. We think it would assist all parties, including the public, if the NPS was clearer and gave guidance on how and when the CAA should engage in the DCO 44

47 process as a statutory consultee. Domestic Connectivity. The NPS should go further in establishing the Government s role in designating Public Service Obligation routes (PSOs), its responsibility for levying APD on domestic flights, and its requirement to facilitate a review of slot releases (potentially utilising the National Aviation Strategy as an avenue for this). 45

48 6. Conclusions We are very supportive of the approach taken in the revised draft NPS, which sets out a strong framework for the promotion of the north west runway at Heathrow For ease of reference and to bring together all of our key comments and recommendations, this section consolidates all of the summary sections at the end of each chapter. Aviation Forecasts The revised DfT aviation forecasts confirm the urgency of the need for additional airport capacity and demonstrate that it is expansion at Heathrow that is uniquely placed to bring substantial economic benefits far more quickly and with more certainty than expansion at Gatwick.The DfT evidence base supports the conclusion in the NPS that only Heathrow meets the overall needs case for increased capacity and in maintaining the UK s hub status. The DfT s economic appraisal, however, continues to underestimate the economic benefits of Heathrow expansion by not fully recognising the significant passenger and wider economic benefits from trade, tourism and investment that would be realised. Recognising these additional benefits in the NPS would further reinforce the strength of the case for expanding Heathrow. We recommend that the NPS recognises the potential economic benefits uniquely available at Heathrow through the early release of capacity on the existing runways in advance of the construction of the north west runway. Air Quality The 2017 Plan Re-Analysis demonstrates that Heathrow Expansion would not delay compliance with the UK s legal air quality obligations. The 2017 Plan Re-Analysis represents a worst case assessment, based on very conservative assumptions, that does not take account of our mitigation strategies, including our triple lock commitment which guarantees that new capacity at an expanded airport will only be released when it is clear that the airport s effect on air quality levels will not delay compliance with the UK's legal air quality obligations Carbon The economic and strategic benefits of expanding Heathrow are consistent with meeting the UK s climate change obligations and hub capacity shall be prioritised in a carbon constrained world. 46

49 Noise We are confident that our DCO application will be able to satisfy the noise assessment principles set out in the draft NPS. Surface Access The NPS should reaffirm the Government s policy support for transport infrastructure projects which will deliver wider connectivity and economic benefits, and the promotion of these at the earliest opportunity (specifically Western Rail Access and Southern Rail Access) HRA We remain confident, as indicated in our response to the consultation on the draft NPS published in May 2017, that the project-level HRA will in due course confirm that Heathrow expansion can be delivered without an adverse effect on the integrity of European sites. Scheme Promoter We recommend that the NPS identifies Heathrow Airport Ltd as the only plausible promoter of the north west runway. In the absence of this, the NPS should set out clearly the criteria any applicant would need to meet in bringing forward the delivery of the scheme. Runway Length We recommend that the NPS recognises that it may be acceptable to develop a runway slightly longer or shorter than 3,500m if it can be demonstrated that such a runway still meets all of the capacity and capability requirements of the NPS. Annexes A and B to the draft NPS We recommend that the NPS is revised to more clearly explain more clearly the relationship between the land identified for statutory blight purposes and that which may legitimately be proposed within the DCO application as a result of detailed assessment, scheme development and stakeholder consultation. Associated Development The NPS should recognise that significant associated development will be required to support the construction, operation and mitigation of the north west runway. Green Belt We recommend that the NPS removes the requirement for the applicant to secure the replacement of Green Belt land. 47

50 Role of CAA We think it would assist all parties, including the public, if the NPS was clearer and gave guidance on how and when the CAA should engage in the DCO process as a statutory consultee. Domestic Connectivity The NPS should go further in establishing the Government s role in designating Public Service Obligation routes (PSOs), its responsibility for levying APD on domestic flights, and its requirement to facilitate a review of slot releases (potentially utilising the National Aviation Strategy as an avenue for this). 48

51 Appendix 1 Paragraph by Paragraph Response to the Revised Draft NPS The table appended below provides our commentary on relevant paragraphs of the revised draft NPS. Our comments should be read in conjunction with those we made previously in our May 2017 response. Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments 1.6 The Airports Commission s remit also required it to look at how to make best use of existing airport infrastructure, before new capacity becomes operational.8 The Commission noted in its final report that a new runway will not open for at least 10 years. It therefore considered it imperative that the UK continues to grow its domestic and international connectivity in this period, which it considered would require the more intensive use of existing airports other than Heathrow and Gatwick.9 It is not apparent from the Airports Commission s final report that it intended to exclude the existing infrastructure at Heathrow and Gatwick from the requirement to more intensively use existing airports. The sense of its conclusions, of course, applies to all airport infrastructure. This would include, for instance, any capacity to more intensively use the existing 2 runways at Heathrow. It would therefore be sensible to alter the last 5 words from this paragraph to read "in addition to Heathrow and Gatwick". This approach is consistent with the overall conclusions of the Airports Commission which provided: delivery of new runway capacity will necessarily take several years to complete. In the meantime the need to make best use of existing infrastructure will remain In particular, the Secretary of State will use the Airports NPS as the primary basis for making decisions on any development consent application for a new Northwest Runway at Heathrow Airport, which is the Government s preferred scheme. The policies in the Airports NPS will have effect in relation to the Government s preferred scheme, having a runway length of at least 3,500m and enabling at least 260,000 additional air transport movements per annum.11 annum.13 It will also have effect in relation to terminal infrastructure associated with the Heathrow Northwest Runway scheme and the reconfiguration of the central terminal facilities in the area between the two Runway Length. This matter is addressed in Section 5.5 in our principal submission. There, we suggest a revised wording for this paragraph to include the following:- The policies in the Airports NPS will have effect in relation to the Government s preferred scheme, having a runway length of at least approximately 3,500m and enabling at least 260,000 additional air transport movements per annum, accommodating the largest commercial aircraft and providing equivalent operational performance to the existing two runways at Heathrow Airport, or such other length of runway as satisfies these conditions. Terminal Capacity. We suggest that the third 49

52 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement existing runways at Heathrow Airport. For the avoidance of doubt, the Airports NPS does not identify any statutory undertaker as the appropriate person or appropriate persons to carry out the preferred scheme. Our Comments sentence of this paragraph be amended as follows, so as not to be unnecessarily prescriptive about the precise location of the terminal capacity being provided. In particular, we consider that it is important that the wording enables the extension of existing terminal facilities to provide additional capacity if required. We would therefore suggest the following amendment: It will also have effect in relation to terminal capacity associated with the Heathrow Northwest Runway scheme and the reconfiguration of terminal facilities in the areas between the two runways at Heathrow Airport. Scheme Promoter. Section 5.4 of our principal submissions responds to the additional sentence now proposed at the end of this paragraph relating to the appropriate party to carry out the preferred scheme. For the reasons set out there, we consider that Heathrow Airport should be identified as the promoter. If that is not a preferred route, it is important that the NPS identifies the relevant criteria that an appropriate undertaker should meet in order to limit the significant adverse impacts that could arise from inappropriate, un-coordinated project promotion. Please see our detailed submissions on this in Section 5.4 of our main response The Habitats Regulations Assessment concluded that it cannot rule out the potential for adverse effects on the integrity of European sites adjacent to or at a distance from the preferred scheme, given that more detailed project design information and detailed proposals for mitigation are not presently available. The Airports NPS has thus been considered in line with the requirements set out in Article 6(4) of the Habitats Directive. Consideration has been given to potential alternatives to the preferred scheme, and the conclusion was reached that there were no alternatives that would better respect the integrity of European Sites and deliver the objectives of the Airports Please see Section 4.5 of our principal submissions and Appendix 2 for our detailed submissions on the Habitats Regulations Assessment (HRA). 50

53 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement NPS in relation to UK airport capacity and meeting the identified needs for additional capacity provision. Accordingly, the Government has presented its case why imperative reasons of overriding public interest exist which provide the rationale for why the Airports NPS should be designated, given the presently uncertain conclusions identified by the Habitats Regulations Assessment. The strategic level Habitats Regulations Assessment, conducted in accordance with the Conservation of Habitats and Species Regulations 2010, concluded that the potential for the preferred scheme to have adverse effects on the integrity of European sites for the purposes of Article 6(3) of the Habitats Directive could not be ruled out. This is because more detailed project design information and detailed proposals for mitigation are not presently available and inherent uncertainties exist at this stage. The draft Airports NPS has thus been considered in accordance with Article 6(4) of the Habitats Directive. Consideration has been given to alternative solutions to the preferred scheme, and the conclusion has been reached that there are no alternatives that would deliver the objectives of the Airports NPS in relation to increasing airport capacity in the South East and maintaining the UK s hub status. In line with Article 6(4) of the Directive, the Government considers that meeting the overall needs case for increased capacity and maintaining the UK s hub status, as set out in chapter two, amount to imperative reasons of overriding public interest supporting its rationale for the designation of the Airports NPS. At detailed design stage, and in so far as it may be necessary, the matters set out in the Airports NPS will be relevant to determining whether there are alternative solutions and imperative reasons of overriding public interest, provided that the design remains consistent with the objectives of the Airports NPS. Our Comments 51

54 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments Under the Equality Act 2010, public bodies have a statutory duty to ensure race, disability and equality are considered in the exercise of their functions. The Interim Equality Impact Assessment considered the potential equalities implications of airport expansion, including the effect on persons or groups of persons who share certain characteristics protected by the Equality Act The Interim Equality Impact Assessment concludes that all of the shortlisted schemes will have effects on these groups, but that such effects can be managed and can ultimately be within appropriate limits. The Airports NPS requires that final impacts on affected groups should be the subject of a detailed review, carefully designed through engagement with the local community, and approved by the Secretary of State. It should be possible to fully or partially mitigate negative equalities impacts through good design, operations and mitigation plans The Health Impact Assessment identified impacts which would affect the population s health, including noise, air quality and socio-economic impacts. In order to be compliant with the Airports NPS, a further project level Health Impact Assessment is required. The application should include and propose health mitigation, which seeks to maximise the health benefits of the scheme and mitigate any negative health impacts. As per our submission to the draft NPS consultation in May 2017, we suggest that it should also be made clear that the Secretary of State's approval referred to in this sentence is within the context of the making of a DCO and not some separate approval process. Please also see our comments in relation to paragraph 4.24 of the revised draft NPS (below). As per our submission to the draft NPS consultation in May 2017, this paragraph is an example of a number of paragraphs in the draft NPS which use the words maximise and minimise, which are unhelpful terms in the context of a policy document, as is the expectation that any harm will be mitigated. We fully support the principles set out here but consider that the language should be more measured and realistic. This is a wider point across the draft NPS and we submit that the necessary amendments should be made throughout the document. We have outlined at the following paragraphs, as referred to in the text below, that references to "maximise" and "minimise" should be amended: 4.31, 5.5, 5.90, 5.103, 5.222, and We note that on occasion this has helpfully already taken place, such as in paragraph 5.16 in which the word "maximise" has been replaced by "increase". 52

55 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments 1.37 On 21 July 2017, the Government issued a call for evidence on a new Aviation Strategy. The Government stated that in light of the Airports Commission s findings on more intensive use of existing airports, it was minded to be supportive of all airports who wish to make best use of their existing runways, including those in the South East (with the exception of Heathrow, whose proposed expansion is addressed in the Airports NPS). However such airports would still need to submit an application (for planning permission or development consent) to the relevant authority, which would need to be judged on the application s individual merits. The Government s policy on this issue will continue to be considered in the context of developing its new Aviation Strategy, and in light of responses to the call for evidence The Airports NPS has effect in relation to the delivery of additional airport capacity through the provision of a Northwest Runway at Heathrow Airport. It also applies to proposals for new terminal capacity located between the new Northwest Runway and the existing Northern Runway at Heathrow Airport, as well as the reconfiguration of terminal facilities in the area between the two existing runways at Heathrow Airport s central terminal area. Each of these elements is also capable of constituting a nationally significantly Significant infrastructure project. Please see our comments above in relation to paragraph 1.6. We agree that proposals for the expansion of Heathrow, including the better use of the existing runways, should be promoted through our proposed DCO and considered against this NPS. However, this paragraph should not be read to suggest any presumption against the best use of the existing infrastructure at Heathrow outside the terms of the NPS. We have made similar representations to the Government s draft Aviation Strategy. As we set out in our previous submission in May 2017, the precise location of new terminal capacity required in association with additional runway capacity will be determined through further scheme refinement, environmental assessment and engagement, as part of the DCO process. In particular, we consider that it is important that the wording enables the extension of existing terminal facilities to provide additional capacity if required. We therefore suggest that the second sentence of this paragraph be replaced with: It also applies to proposals for additional terminal capacity associated with the new runway. 53

56 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments The Airports NPS does not have effect in relation to an application for development consent for an airport development not comprised in an application relating to: The Airports NPS does not have effect in relation to an application for development consent for an airport development not comprised in an application relating to the Heathrow Northwest Runway, and proposals for new terminal capacity located between the Northwest Runway at Heathrow Airport and the existing Northern Runway and reconfiguration of terminal facilities between the two existing runways at Heathrow Airport s central terminal area. Nevertheless, the Secretary of State considers that the contents of the Airports NPS will be both important and relevant considerations in the determination of such an application, particularly where it relates to London or the South East of England. Among the considerations that will be important and relevant are the findings in the Airports NPS as to the need for new airport capacity and that the preferred scheme is the most appropriate means of meeting that need It is very challenging to put a precise figure on these impacts, but using alternative approaches the Airports Commission estimated these costs to be between 30 billion and 45 billion over 60 years. years. The Airports Commission urged caution interpreting these figures, which overlap with the direct passenger costs reported above and so are not wholly additional. But they do illustrate that not increasing airport capacity carries real economic costs to the whole economy beyond aviation passengers. Having reviewed this further, the Government accepts this analysis and considers that recent demand growth in the South East suggests an even greater possible cost if expansion is not undertaken In its Final Report in July 2015, the Airports Commission concluded that the proposed Northwest Runway at Heathrow Airport presented the strongest case for expansion and would offer the greatest strategic and economic benefits to the UK. Please see our comment and suggested amendment in relation to paragraph 1.38 above. Please see our detailed commentary on these figures in Section 2 of our response. Please see our detailed commentary on the issue of flexibility in Section 5.6 of our response. 54

57 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments A copy of the illustrative Heathrow Northwest Runway scheme masterplan is included at Annex B. The Airports Commission also made clear that expansion would have to involve a significant package of supporting measures to address the environmental and community impacts of the new runway The Commission s remit also required it to look at how to make best use of existing airport infrastructure, before new capacity becomes operational. 54 The Commission noted in its final report that a new runway will not open for at least 10 years. It therefore considered it imperative that the UK continues to grow its domestic and international connectivity in this period, which it considered would require more intensive use of existing airports other than Heathrow and Gatwick The work on air quality, which demonstrated that expansion (with mitigation) is capable of taking place within legal limits, is outlined in the Government s air quality re-analysis 50 re- analysis 58 and the Appraisal of Sustainability. Both documents contain a worst case scenario This is was demonstrated by the forecasts produced by the Airports Commission. 60, and continues to be found in the department s 2017 forecasts. 68 Compared to no expansion, the Airports Commission estimated Government estimate that a Northwest Runway at Heathrow Airport by 2040 would result in 125, ,000 additional flights a year across the UK as a whole (including 39,000 43,000 long haul), and million additional passengers a year. By way of comparison, the Extended Northern Runway would add 104,000 85,000 more flights and million additional passengers. 61 passengers Please see above our comments and suggested drafting amendments in relation to paragraph 1.6. The correct interpretation of the Airports Commission final report is that more intensive use should be made of existing airports, including Heathrow and Gatwick. We would be grateful if the language of this paragraph could be amended as for paragraph 2.18 so as to refer to legal obligations rather than "legal limits" as this is more correct and consistent with other paragraphs of the revised draft NPS. Please see our representations in relation to the revised forecasts in Section 2 of our response. 55

58 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments Compared to no expansion, the Second Runway scheme at Gatwick would add 54,000 15,000 flights and million passengers by 2040, across the UK as a whole, increasing to 60,000 77,000 and million respectively in The Airports Commission projected Government project that 8,000 of these additional flights would be long haul in 2040, rising to 15,000 in ,000 in Gatwick Airport has recently been successful in securing a number of long haul routes to the USA and Canada from low cost carriers, a new market segment Expansion via the Heathrow Northwest Runway scheme is best placed to address this need. Heathrow Airport is currently the busiest two runway airport in the world, already operating at full capacity, with substantial pent up demand from passengers and airlines. Expansion at Heathrow Airport would increase the availability of services, and increase competition between airlines. This would lower fares that passengers can expect to face relative to no expansion, leading to significant benefits to business and leisure passengers and the wider economy (not including wider trade benefits) of up to 61 billion over 60 years Crucially, the extent of the pent up demand at Heathrow Airport means that these benefits will be experienced more rapidly once the new capacity is operational, with both Heathrow schemes providing more passenger benefits by 2050 than the Gatwick Second Runway scheme., and with total benefits (not including wider trade benefits) of up to 74 billion over 60 years for the Northwest Runway scheme These benefits are expected to be realised by passengers across the UK as they make use of the additional services provided by the expanded airport. Cumulative benefits delivered by a Northwest Runway scheme remain highest throughout most of the appraisal period, until the mid-2070s, Please see our representations in relation to the revised forecasts in Section 2 of our response. Please refer to our commentary on the revised passenger forecasts in Section 2 of our main response. For the reasons explained there, we doubt the worth or robustness of a 60-year analysis, particularly when it is common ground that the need for capacity is urgent. However, notwithstanding the significant constraints in the model, the updated forecasts demonstrate substantially greater economic and passenger benefits at Heathrow than at Gatwick in the years to

59 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement although total benefits are slightly lower than would be delivered by Gatwick expansion over the full 60 year assessment. 77 Our Comments Expansion also brings a wider wide set of non-monetised benefits such as local job creation, trade, and freight benefits, which indicate a stronger case for a Heathrow scheme than for the Gatwick Second Runway scheme. 71 scheme The Government recognises the importance that the nations and regions of the UK attach to domestic connectivity, particularly connections into Heathrow Airport. Airports across the UK provide a vital contribution to the economic wellbeing of the whole of the UK. Without expansion, there is a risk that, as airlines react to limited capacity, they could prioritise routes away from domestic connections. The Government therefore sees expansion at Heathrow Airport as an opportunity to not only protect and strengthen the frequency of existing domestic routes, but to secure new domestic routes to the benefit of passengers and businesses across the UK. Please see our detailed commentary on such benefits in Section 2 of our response. Please refer to our detailed commentary on domestic connectivity in Section 5.11 of our main submission. We welcome the changes made to the draft NPS but suggest they should go further to identify the role which the Government has to play in securing domestic routes. 57

60 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments Passengers from across the UK are likely to benefit from the improved international connectivity provided by expansion. By In 2040, million additional passengers from outside of London and the South East are forecast to make one way international journeys journeys 82 from Heathrow Airport. Under a Gatwick Second Runway scheme, 3.8 million additional passengers from outside London and the South East would be forecast to make one way international journeys from Gatwick Airport in By way of comparison, under a Heathrow Extended Northern Runway scheme, million additional passengers from outside London and the South East would be forecast to make one way international journeys from Heathrow Airport in While expansion will also see some displacement of passengers from regional airports to the London system, overall regional airports are expected to continue displaying strong growth in passenger numbers by The Government recognises that air routes are in the first instance a commercial decision for airlines and are not in the gift of an airport operator. But the Government is determined that these new routes will be secured, and will hold Heathrow Airport to account on this. The Government requires Heathrow Airport to demonstrate it has worked constructively with its airline customers to protect and strengthen existing domestic routes, and to develop new domestic connections, including to regions currently unserved Access to Gatwick relies on the M23 and the Brighton Main Line, which means it serves London well but makes it less convenient for onward travel to the rest of the UK. It is also less resilient than Heathrow Airport. Heathrow Airport has advantages over Gatwick Airport with its greater integration into the national transport network, benefitting both passengers and freight operators. It also currently has significantly larger freight The DfT model is robust in overall numbers of passengers, although it does not fully capture all of the value that hub airports like Heathrow will deliver. Overall the updated numbers show the need for Heathrow Expansion is now even more urgent. How the model allocates passengers that can t be accommodated in a full Heathrow is more uncertain. This does not change the conclusion that only Heathrow can bring the benefits of expansion quickly. The DfT have also since published a note emphasising that the forecasts are of a long term strategic nature, focussed at estimating demand at the national and regional level. As the model doesn't take into account potential commercial deals or specific airline strategies, the DfT recommends local forecasting is considered alongside the DfT forecasts for short term airport specific assessments. This statement is in response to complaints raised by MAG and other regional airports about the DfT forecasts for their individual airports. Please refer to our detailed commentary on domestic connectivity in Section 5.11 of our main submission. It would be useful for Government to recognise here that the law constrains what Heathrow Airport may do to secure domestic routes. We welcome the Government s acknowledgement in the NPS that Heathrow s freight operations are extensively larger in terms of both tonnage and value; please see our detailed commentary in Chapter 2 of our main response. In fact, the latest data demonstrates that Heathrow s cargo operations actually handle around 36 times more cargo by tonnage than Gatwick s. 58

61 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement operations than Gatwick Airport, around 20 times larger in terms of total tonnage 76 tonnage 88 and over 200 around 170 times larger in terms of value. 77 value. 89 Our Comments The airport scheme promoters have pledged to meet the cost of surface access schemes required to enable a runway to open. For Gatwick Airport, this covers the full cost of the works (including the M23 and A23) needed to support expansion. The two Heathrow schemes would pay for the full cost of M25, A4 and A3044 diversions and local road works. They would make a contribution towards the cost of the proposed Western Rail Access and Southern Rail Access schemes. Improvements which are already underway, such as Thameslink and Crossrail, will be completed, and the Government has not assumed any change to these schemes existing funding The majority of the surface access costs where a split of beneficiaries is expected (for example, where multiple businesses and the public at large benefit from a new road junction or rail scheme) are likely to be borne by Government, as where the schemes provide greater benefits for nonairport users. The airport contribution would be subject to a negotiation, and review by regulators Because of the early stages of development, there is some variability of surface access costs, which are subject to more detailed development and, for example, choices over precise routes. The additional public expenditure effects of the options would likely be as follows: For both Heathrow proposals, there is no Government road spend directly linked to expansion; the promoter would pay for changes to the M25, A4 and A3044 and any local roads. The Western and Southern Rail schemes are at different levels of development and, based on current estimates, could cost between 1.4 billion and 2.5 We are concerned that wording in this paragraph that refers to the Heathrow schemes paying "for the full cost of M25, A4 and A3044 diversions and local roads" is inconsistent with the wording in paragraph 5.18 which states "The Government expects the applicant to secure the upgrading or enhancing of road, rail or other transport networks or services which are physically needed to be completed to enable the Northwest Runway to operate." We propose that the wording is changed to read: "Each of the two Heathrow schemes The two Heathrow schemes would pay for the full cost of M25, A4 and A3044 diversions and local road works, which are required to enable the schemes to operate." With regard to the reference to regulatory review, we recommend that the final sentence of this paragraph is amended as follows to ensure clarity on the framework for considering airport contributions towards surface access projects: "The airport contribution would be subject to a negotiation, and review by regulators, taking into account CAA policy on airport contributions towards surface access projects." As with the comment on paragraph 3.38 above, we are concerned by the reference to "the promoter would pay for changes to the M25, A4 and A3044 and any local roads" and potential confusion or inconsistency with paragraph As with paragraph 3.38, we would suggest that the first bullet point is amended to read: "...the promoter would pay for the changes to the M25, A4 and A3044 and local roads which are required to enable the Northwest Runway to operate." Further, we reiterate the point made in our May 2017 submission regarding the need to amend the first bullet point to ensure it is consistent with policy on surface access contributions set out in the Aviation Policy Framework. We would recommend the following amendment to the 59

62 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments billion together the cost estimates will change as these schemes are developed. The Government would expect this cost the costs of the schemes to be partly offset by airport contributions, which would be negotiated when the schemes reach an appropriate level of development. For the Gatwick proposal, there would be no additional public expenditure solely because of expansion, as all road enhancement costs for airport expansion would be met by the scheme promoter. The Government has assumed that any improvements to the Brighton Main Line that may be required would take place regardless of expansion and would be publicly funded The Appraisal of Sustainability presents an assessment of the local environmental impact of all three schemes. It shows that, while all three schemes are expected to have a negative effect on impacts such as air quality, noise and biodiversity, the Gatwick Second Runway scheme has a less adverse impact than either scheme at Heathrow. This is primarily because Gatwick Airport is in a more rural location, with fewer people impacted by the airport. Even so, as set out in the Further Review and Sensitivities Updated Appraisal Report, in monetary terms, the environmental impacts of all three schemes are small when compared to the size of the benefits, or considered over the 60 year appraisal period. In addition, the Appraisal of Sustainability also sets out potential measures to mitigate these local impacts to ensure that legal limits will be met. As set out below, the Government believes this demonstrates how the commitment to ensure that local impacts of expansion will be mitigated satisfactorily can be met. text: The Western and Southern Rail schemes are at different levels of development and the cost estimates will change as these schemes are developed. The Government would expect the costs of the schemes to be partly offset by airport contributions which recognising the range of beneficiaries for such schemes and will consider, along with other relevant stakeholders, the scale of contribution required from the airport. Any contribution would be negotiated when the schemes reach an appropriate level of development. As previously mentioned in our May 2017 submissions, to ensure consistency with other parts of the NPS (in particular the sections on air quality) and to ensure that the reference covers all areas where mitigation might be needed to meet legal obligations, we consider that the following part of this paragraph should be amended as follows: "In addition, the Appraisal of Sustainability also sets out potential measures to mitigate these local impacts to ensure that legal limits obligations will be met." 60

63 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments Heathrow Airport has committed to ensuring its landside airport-related traffic is no greater than today. In addition, the The airport will be expected to achieve a public transport mode share of at least 50% by 2030, and at least 55% by 2040, for passengers The needs case has shown the importance of developing more capacity more quickly, and in a form which passengers and businesses want to use. The Heathrow Northwest Runway scheme is best placed to deliver this capacity, delivering the greatest benefits soonest as well as providing the biggest boost to the UK s international connectivity, doing so in the 2020s at a point when without the scheme 4 out of 5 London airports would be full, with all the problems to passengers this could entail. Taken together, benefits to passengers and the wider economy are substantial, even having regard to the proportionally greater environmental disbenefits estimated for the Heathrow Northwest Runway. Even though the preferred scheme s environmental disbenefitsare larger than those of the Gatwick Second Runway scheme, when all benefits and disbenefits are considered together, 98 overall the Heathrow Northwest Runway scheme is considered to deliver the greatest net benefits to the UK. are larger than those of the Gatwick Second Runway scheme, when all benefits and disbenefits are considered together, 109 overall the Heathrow Northwest Runway scheme is considered to deliver the greatest net benefits to the UK. Please refer to our comments in relation to paragraph 5.16 (below). It is more appropriate to deal with assessment criteria in section 5 of the NPS, to avoid confusion and inconsistency. We therefore request that paragraph 3.50 is either deleted or revised to reflect the wording exactly as set out in paragraphs 5.16 and 5.37, where the wording reflects terms that are more appropriate to planning. The importance of this distinction is that the DCO would normally be expected to be determined in accordance with the NPS; it is therefore necessary for the NPS to be clear by setting out a single and consistent statement of its requirements or policy tests. This paragraph should recognise that the Heathrow Northwest Runway scheme is not only best placed to deliver this capacity but is the ONLY way to deliver the international hub capacity necessary to boost international connectivity whilst maximising other benefits. 61

64 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments 4.3 The Airports NPS applies to schemes at Heathrow Airport (in the area shown within the illustrative scheme boundary map at Annex A) that include a runway of at least 3,500m in length and that are capable of delivering additional passenger capacity of at least 260,000 air transport movements per annum, and associated infrastructure and surface access facilities,. In particular, it also applies to the reconfiguration of and provision of new terminal areas of capacity to be located between the two existing runways at Heathrow Airport shown on the illustrative masterplan at Annex B. The Secretary of State s policy in relation to other airport infrastructure in the South East of England is set out at paragraph above. Runway Length. Please see our detailed representations in Section 5.5 of our principal submission. Terminal Capacity. Please also see our comments and proposed amendments in relation to paragraph 1.38 in relation to the location of terminal infrastructure, which should also be reflected in relation to this paragraph. Flexibility. Please see our detailed representations in Section 5.6 of our principal submission. Please also see our comments and proposed amendments in relation to paragraph 1.15 in relation to runway length, which should also be reflected in relation to this paragraph. We know from paragraph 1.15 that the Secretary of State will use the NPS as the primary basis for making decisions on any development consent application for a new Northwest Runway at Heathrow, whilst paragraph 4.11 makes clear that any application which falls within the boundaries and parameters set out in the NPS will benefit from the full support of the NPS. The NPS nevertheless applies to any DCO application which meets the requirements of paragraph The text at paragraph 4.3 is not inconsistent with this because it does not preclude the application of the NPS to schemes outside the scheme boundary map at annex A a map which is in any event illustrative. Nevertheless, we consider that there is scope for the public to find this confusing, and that these various references could be more closely aligned to avoid any such misunderstanding. In essence, we believe that the NPS could helpfully be clearer about the status of the Annex A illustrative red line boundary. The simplest way of addressing this would be to delete the words "(in the area shown within the illustrative scheme boundary map at Annex A)" in the paragraph so that there would then be no doubt that paragraph 4.3 is consistent with paragraphs 1.15 and This approach would also be consistent with paragraphs 1.38 and

65 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments 4.6 The National Networks NPS sets out the Government s policies to deliver development of nationally significant infrastructure projects on the national road and rail networks and strategic rail freight interchanges. It provides planning guidance for promoters of nationally significant infrastructure projects on the road and rail networks, and the basis for the examination by the Examining Authority and decisions by the Secretary of State. 4.7 Where the applicant s proposals in relation to surface access meet the thresholds to qualify as nationally significant infrastructure projects under the Planning Act 2008, or is associated development under section 115 of the Planning Act 2008, the Secretary of State will consider those aspects by reference to both the National Networks NPS and the Airports NPS, as appropriate. To the extent that discrete aspects of the surface access proposals do not qualify as nationally significant and cannot be included in a development consent application as associated development (for example), the applicant will be expected to pursue or secure necessary consent(s) through the most appropriate alternative consenting regime. This might include, for example, the Town and Country Planning Act 1990, the Highways Act 1980, or the Transport and Works Act 1992, or a separate development consent application, promoted by a third party if need be. As set out in our May 2017 submission, we agree with this paragraph, but it would be useful if this NPS went further to set out explicit policy support (which will not be found in the National Networks NPS) for those schemes being promoted by third parties in so far as they provide surface access or other solutions for the Heathrow north west runway. As set out in our May 2017 submission, we consider it is hard to contemplate that any form of surface access works reasonably related to the delivery of the airport infrastructure could not be considered either as associated development to the DCO or as a Nationally Significant Infrastructure Project (NSIP) in its own right. It is unhelpful for the draft NPS to suggest that "discrete aspects of the surface access proposals might not be either associated development or a NSIP". That reference should be removed. There is however, the possibility that it may be appropriate nevertheless to apply for some advance enabling works which would then be the subject of a separate appropriate consenting regime such as under the Town and Country Planning Act 1990 (as amended). It may also be that other infrastructure such as any additional rail schemes may come forward as a separate project under the DCO process or possibly under the Transport and Works Act or Hybrid Bill processes. We therefore suggest that the NPS should expressly confirm that the NPS will represent an important and relevant consideration for such applications under separate consenting routes, thereby providing positive policy support. This approach will ensure that the widest possible range of consenting options and timing remains open to facilitate the most appropriate way of developing the scheme. Further in this regard, as Heathrow develops its 63

66 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments 4.11 While the Government has decided that a Northwest Runway at Heathrow Airport is its preferred scheme to deliver additional airport capacity (an illustrative masterplan is at Annex B of the Airports NPS), this does not limit variations resulting in the final scheme for which development consent is sought. To benefit from the full support of policy within the Airports NPS, any application(s) will have to fall within the boundaries and parameters set out in the Airports NPS. However, the form of a development for which an application is made is a matter for the applicant. The Airports NPS does not prejudice the viability or merits of any particular application, detailed scheme or applicant. It governs the location, limits and nature of such schemes. It will be for an Examining Authority, and ultimately the Secretary of State, to determine whether any future application is compliant with the Airports NPS, meets the need for additional capacity, and is of benefit to the UK, whilst minimising any harm caused. DCO for expansion, other proposals are likely to come forward, such as Network Rail s DCO for the Western Rail Link to Heathrow and further development of proposals for Southern Rail Access. This paragraph notes that the National Networks NPS will apply to the consideration of those proposals but it would be useful if this NPS set out explicit policy support (which will not be found in the National Networks NPS) for those schemes being promoted by third parties in so far as they provide improved accessibility to the airport. Please see our representations on the issue of flexibility in Section 5.6 and on associated development in Section 5.7 of our main response. Please also see our comments in relation to paragraph 4.3 above. In addition, we suggest the following sentence is added to the end of this paragraph in respect of associated development to provide clarity in respect of the significance of Annex B: Significant associated development will be required to support the construction, operation and mitigation of the north west Runway scheme. This could potentially include development related to construction activities, airport support facilities, airport related development, mitigation works and the replacement of facilities affected by the expanded airports footprint. As above, the form of development for which an application is made is a matter for the applicant having regard to the provisions of this NPS and relevant DCLG Guidance on associated development for major infrastructure projects The Appraisal of Sustainability to the Airports NPS sets out an assessment of equalities impacts, informed by the work of the Airports Commission. The Airports Commission was clear that its assessment was based upon current scheme design, and that a more detailed equalities impact assessment Equality Impact Assessment would likely be necessary as design, supporting measures and operational plans were developed. As outlined in our submission in May 2017, we note that the Government's duty under the Equalities Act 2010 is ongoing, and would therefore expect that the Government will undertake a comprehensive updated Equalities Impact Assessment based on the final form of the National Policy Statement, after it has been updated following consultation, and prior to it being designated. 64

67 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments 4.27 For any application to be considered compliant with the Airports NPS, it must be accompanied by a project level equalities impact assessment Equality Impact Assessment examining the potential impact of that project on groups of people with protected characteristics. In order to benefit from the support of the Airports NPS, the results of that project level equalities impact assessment Equality Impact Assessment must be within the legal limits and parameters of acceptability outlined in the Appraisal of Sustainability that informs the Airports NPS. As noted in our May 2017 submission, it would be helpful if the reference to the "legal limits and parameters of acceptability outlined in the Appraisal of Sustainability" is rephrased to provide clarity on which legal limits and parameters are being referred to in this paragraph A good design should meet the principal objectives of the scheme by eliminating or substantially mitigating the identified problems by improving operational conditions and simultaneously minimising adverse impacts. It should also mitigate any existing adverse impacts wherever possible, for example in relation to safety or the environment. A good design will also be one that sustains the improvements to operational efficiency for as many years as is practicable, taking into account capital cost, economics and environmental impacts Adaptation is therefore necessary to deal with the potential impacts of these changes that are already happening. New development should be planned to avoid increased vulnerability to the range of impacts arising from climate change. When new development is brought forward in areas which are vulnerable, care should be taken to ensure that risks can be managed through suitable adaptation measures, including through the provision of green infrastructure. We are committed to developing a proposal which limits its environmental impacts, mitigates those which cannot be further limited and which, where appropriate, provides compensation, so long as the approach is relevant to planning and consistent with the principles set out in paragraphs 4.9 and It is not practical, however, to eliminate impacts, whilst the use of the word minimising applied literally is expected to be difficult to address. The paragraph should be revised in accordance with standard planning policies. It should also relate to the impacts of the development rather than the general reference to identified problems. Similarly, the expectation that good design would mitigate any existing adverse impacts wherever possible is both vague and inconsistent with normal planning policy. Overall, the paragraph should be revised to develop a more standard approach. As set out in our May 2017 submissions we suggest that the words "including through" are replaced by the words "such as but not limited to". This would make clear that the provision of green infrastructure is only one example of a suitable adaptation measure. 65

68 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments 4.49 Issues relating to discharges or emissions from a proposed project which affect air quality, water quality, land quality or the marine environment, or which include noise, may be subject to separate regulation under the pollution control framework or other consenting and licensing regimes. Relevant permissions will need to be obtained for any activities within the development that are regulated under those regimes before the activities can be operated The defence of statutory authority is subject to any contrary provision made by the Secretary of State in any particular case by an order granting development consent. 115 consent Air transport is one of the safest forms of travel, and the UK is a world leader in aviation safety. Maintaining and improving that record, while ensuring that regulation is proportionate and cost-effective, remains of primary importance to the UK. Since 2003, rules and standards for aviation safety in Europe have increasingly been set by the European Aviation Safety Agency. The UK will continue to work closely with the European Aviation Safety Agency to ensure that a high and uniform level of civil aviation safety is maintained across Europe. The preferred scheme at Heathrow must comply with the UK s civil aviation safety regime, regulated by the Civil Aviation Authority. 5.5 The Government s objective for surface access is to ensure that access to the airport by road, rail and public transport is high quality, efficient and reliable for both passengers, freight operators and airport workers who use transport on a daily basis. The Government also wishes to see the number of journeys made to airports by sustainable modes of transport maximised as much as possible. This should be delivered in a way that minimises congestion and environmental As set out in our submission in May 2017, we consider that it would be beneficial in this section to refer to the fact that certain consents and licences can be wrapped into the DCO, and to confirm that it should be assumed that in such cases the relevant pollution control regime will be applied and enforced, in the same way as it is assumed in relation to permissions that need to be obtained separately. As noted in our May 2017 submission, we consider that it would be helpful to provide guidance in the NPS in relation to the defence of statutory authority and the specific circumstances in which this would not be preserved. We consider it important to preserve the defence of statutory authority unless there are compelling reasons for not doing so, and thinks it is important that the NPS is clear on this point. The policy is set by the EASA, not the Civil Aviation Authority, so we would suggest that for accuracy the final sentence should read: "The preferred scheme at Heathrow must comply with the UK's civil aviation safety regime, regulated overseen by the Civil Aviation Authority." We consider that "maximised as much as possible" is unhelpful in planning terms and at a DCO examination. It would be better if this was re-phrased as "increased as far as practicable as part of the scheme." This is in line with the approach in the Aviation Policy Framework which requires surface access plans to simply "increase" these kinds of journeys. 66

69 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement impacts, for example on air quality. Our Comments 5.7 It is important that improvements are made to Heathrow Airport s transport links to be able to support the increased numbers of people who will need to access the expanded airport, should development consent be granted. 5.8 The applicant must prepare an airport surface access strategy in conjunction with its Airport Transport Forum, in accordance with the guidance contained in the Aviation Policy Framework. 120 Framework. 131 The airport surface access strategy must reflect the needs of the scheme contained in the application for development consent, including any phasing over its development, implementation and operational phasesstages, reflecting the changing number of passengers, freight operators and airport workers attributable to the number of air traffic movements. The strategy should reference the role of surface transport in relation to air quality and carbon. The airport surface access strategy must contain specific targets for maximising the proportion of journeys made to the airport by public transport, cycling or walking. The strategy should also contain actions, policies and defined performance indicators for delivering against targets, and should include a mechanism whereby the Airport Transport Forum can oversee implementation of the strategy and monitor progress against targets alongside the implementation and operation of the preferred scheme. As set out in our previous submission, it would be useful if it was clarified in this paragraph that the "improvements" to "Heathrow Airport's transport links" will comprise those for mitigation to be identified as necessary in the surface access strategy through the process set out in paragraphs 5.14 to 5.19 and 5.21 of the draft NPS and also other improvements of wider benefit, including Southern Rail Access and Western Rail Access, which may be delivered by third parties. HAL welcomes the reference to phasing in this paragraph. We agree with the requirements in this paragraph as to the production of an airport surface access strategy, however, we note again that the Aviation Policy Framework (APF) refers to "increasing" rather than "maximising" journeys made by public transport and this is the better way for the requirement to be expressed. The phrase maximising could put in place a disproportionate obligation. We recommend that it is replaced with increasing to ensure consistency with the APF and consistency with updated paragraph 5.16 of the NPS. Similarly, Heathrow suggests that the goal must be overall sustainability, in line with the APF (and NPPF) and as such other forms of transport which are sustainable but not necessarily public should also be recognised, particularly given technology development in the transport sector. As such, we recommend that reference is made to sustainable transport rather than public transport. In making the above changes, we consider that this section of the paragraph should be amended as follows: 67

70 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments 5.11 The applicant will need to demonstrate that Highways England, Network Rail and relevant highway and transport authorities and transport providers have been consulted, and are content with the deliverability of any new transport schemes or other changes required to existing links to allow expansion within the timescales required for the preferred scheme as a whole. This includes changes to the M25 to allow a new runway to cross the motorway, local road diversions, and improvements including the diversion of the A4 and A3044, and on-airport station works and safeguarding. "The airport surface access strategy must contain specific targets for maximising increasing the proportion of journeys made to the airport by public sustainable transport, cycling or walking." As noted in our previous response, we are already working closely with key transport authorities and providers. However, we consider that there is a risk that the wording of this paragraph creates the potential for a relevant body to prevent the delivery of a scheme by not expressly confirming that they are 'content' with the deliverability of the scheme. We remain concerned that the phrase could inadvertently create a further test of policy beyond the tests set out in this Chapter for the Examining Authority and the Secretary of State. Reaching agreement with key stakeholders is a priority for us, but the test for the decision maker should relate to the acceptability of the outcomes of the proposals, tested against the criteria in Chapter 5. This process is the normal one and operates well for all other major infrastructure schemes where there are significant interfaces. We therefore consider that this paragraph should be re-phrased to state that: 5.16 Any application for development consent and accompanying airport surface access strategy must include details of how the applicant will maximise increase the proportion of journeys made to the airport by public transport, cycling and walking to achieve a public transport mode share of at least 50% by 2030, and at least 55% by 2040 for passengers. The applicant should also include details of how it will achieve a 25% reduction from the current baseline of all staff car trips by 2030, and a reduction of 50% by 2040 from 2017 levels. 123 a 2013 baseline level. 134 "The applicant must consult with the relevant bodies and that its proposals must demonstrate that the relevant bodies' responses have been taken into account in developing the application proposals." Please refer to our comments in relation to paragraph As set out there, it is appropriate that this matter is dealt with here at paragraph 5.16 and that the wording at paragraph 3.50 should either be deleted or updated to reflect the wording in this paragraph, which is more appropriate to planning. We welcome the addition of a baseline figure. Please rephrase the final sentence to clarify that the reference to "2013 baseline level" applies to both the 25% and the 50% reduction in staff car trips: in each case from a 2013 baseline level. 68

71 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments 5.17 The applicant should commit to annual public reporting on performance against these specific targets. The airport surface access strategy should consider measures and incentives which could help to manage demand by car users travelling to and from the airport, as well as physical infrastructure interventions, having at all times due regard to the effect of its strategy on the surrounding area and transport networks. These measures could be used to help achieve mode share targets and should be considered in conjunction with measures to mitigate air quality impacts as described in the Airports NPS. In relation to the wording on mode share targets, the reference in the passenger mode share targets should be to a "sustainable transport mode share" not a "public transport mode share", for the reasons set out in our response to paragraph 5.8. We reiterate our previous comment on this paragraph from our May 2017 submission, and consider it important that this paragraph should refer to road user charges as one of the measures to be considered within the surface access strategy to help manage demand by car users. Although a reference to "an emissionsbased access charge" has been added to paragraph 5.38, we consider it is important for the surface access section of the NPS to acknowledge the wider potential role of road user charges as a means of achieving the NPS requirements in respect of surface access. We have slightly improved our previous suggested drafting and would therefore suggest that this paragraph is amended as follows: "The airport surface access strategy should consider measures and incentives which could help to manage demand by car users travelling to and from the airport, which could include road user charges as well as physical infrastructure interventions, having at all times due regard to the effect of its strategy on the surrounding area and transport networks. These measures could be used to help achieve mode share targets and should be considered in conjunction with measures to mitigate air quality impacts as described in the Airports NPS." Please also see our comments on surface access at section 4.4 of our main response The applicant s surface access proposals will give rise to impacts on the existing and surrounding transport infrastructure. The Secretary of State will consider whether the applicant has taken all reasonable steps to mitigate these impacts. Where the proposed mitigation measures are insufficient to effectively offset or reduce the impact of expansion and any additional passengers, freight operators and airport workers on the transport network, the Secretary of State will impose Whilst it is important to acknowledge the nature of the potential impacts, planning requirements imposed could only relate to the development contained within the application. These changes, however, read as though "the impact of expansion" and "additional passengers, freight operators and airport workers" are different impacts. To clarify this, we suggest the paragraph is amended as follows: 69

72 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments requirements on the applicant to accept requirements and / or obligations to fund infrastructure or implement other measures to mitigate the adverse impacts Provided the applicant is willing to commit to transport planning obligations to satisfactorily mitigate transport impacts identified in the transport assessment (including environment and social impacts), with costs being considered in accordance with the Department for Transport s policy on the funding of surface access schemes, development consent should not be withheld on surface access grounds. " Where the proposed mitigation measures are insufficient to effectively offset or reduce the impact of any additional passengers, freight operators and airport workers arising from expansion any additional passengers, freight operators and airport workers on the transport network, the Secretary of State will impose requirements on the applicant to accept requirements and / or obligations to fund infrastructure or implement other measures to mitigate the adverse impacts." As stated in our last response, we agree that Development Consent should not be withheld on surface access grounds where transport impacts are sufficiently mitigated. However, the reference to the 'Department for Transport's policy on the funding of surface access schemes should be clarified. We assume this is referring to the position set out at paragraph 5.12 of the Aviation Policy Framework in that the costs for surface access projects will be considered against the need for these to support airport growth and the range of beneficiaries of such projects. If this is the case, we recommend the following is added to this paragraph for clarity: 5.27 Air quality impacts are generated by all types of infrastructure development to varying degrees, and the geographical extent and distribution can cover a large area. At Heathrow Airport in , aircraft movements were modelled to have contributed % on average to local levels of NOx on concentrations at nearby areasroadside locations. Road transport, by comparison, accounted for % of NOx emissions concentrations in the same areas. Off-road transport and mobile machinery (a category which would include airside vehicles) contributed 5.2%% 138. "The costs for surface access schemes will be considered against the need for these to support airport growth and the range of beneficiaries of such projects in accordance with the Aviation Policy Framework" We would recommend that it should be made clear that the road transport contributions set out in this paragraph are those of all road traffic, and are not limited to airport related traffic. In addition, we suggest that the area within which the road transport contributions are generated should be clarified. 70

73 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments 5.32 The environmental statement should assess: Existing air quality levels for all relevant pollutants referred to in the Air Quality Standards Regulations 2010 and the National Emission Ceilings Regulations 2002 (as amended) or referred to in any successor regulations; Forecasts of air quality at the time of opening, (a) assuming that the scheme is not built (the future baseline ), and (b) taking account of the impact of the scheme, including when at full capacity; and Any likely significant air quality effects, their mitigation and any residual likely significant effects, distinguishing between those applicable to runway the construction and operation stages of the scheme including any interaction between construction and operational changes and taking account of the impact that the project scheme is likely to cause on air quality arising from road and other surface access traffic Other mitigation measures which may be put forward by the applicant could include, but are not limited to: Landing charges structured to reward airlines for operating cleaner flights (for example NOx emissions charging); Zero- or low-emission hybrid or electric vehicle use (ultra-low emission vehicles), charging and fuel facilities; Reduced or single engine taxiing (improved taxiing efficiency); Reducing emissions from aircraft We welcome some of the clarifications made to this paragraph. However, this paragraph could be further clarified if the second and third bullets were amended as follows: Forecasts of levels for all relevant air quality pollutants at the time of opening, (a) assuming that the scheme is not built (the future baseline ), and (b) taking account of the impact of the scheme, including when at full capacity; and Any likely significant air quality effects of the proposed development, their mitigation and any residual likely significant effects, distinguishing between those applicable to the construction and operation of the scheme including any interaction between construction and operational changes and taking account of the impact that the scheme is likely to cause on air quality arising from road and other surface access traffic. The amendment to the second bullet is required in order to accurately reflect the air quality environmental impact assessment process. We consider that the last line of the final bullet should be deleted because a) the wording is unclear; and b) it is redundant because a competent assessment of the proposed development would be required to assess impacts from changes to traffic attributable to the scheme. We strongly welcome the addition of a reference to an emissions-based access charge in this section on air quality. Please also see our comments on paragraph 5.17 above. 71

74 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement at the gate (for example installation of fixed electrical ground power and preconditioned air to aircraft stands to reduce the use of auxiliary power unit); Modernised heating supplies in airport buildings; Changes to the layout of surface access arrangements; Traffic restrictions and / or traffic relocation around sensitive areas;and An emissions-based access charge; and Physical means, including barriers to trap or better disperse emissions and speed control on roads. Our Comments 5.44 Aircraft noise is not only determined by the number of aircraft overhead, but also by engine technologies and airframe design, the paths the aircraft take when approaching and departing from the airport, and the way in which the aircraft are flown. Footnote 142 We suggest that the wording in this paragraph be clarified on the basis that the list of factors determining aircraft noise set out is not exhaustive. For example, it could read: "Aircraft noise is not only determined by the number of aircraft overhead, but also by a range of other factors including engine technologies and airframe design, the paths the aircraft take when approaching and departing from the airport, and the way in which the aircraft are flown." Please see our comment on footnote 144 below. Footnote The Sustainable Aviation Noise Roadmap, A Blueprint for Managing Noise from Aviation Sources to 2050: Please see our comment on footnote 144 below. 72

75 Para Number Revised Original Footnote Combined (Revised and Original) Paragraphs of Airports National Policy Statement CAP 1164, Aircraft noise, sleep disturbance and health effects: on.aspx?appid=11&mode=detail&id=6275 CAP 1506, Survey of noise attitudes 2014: Aircraft /survey-of -attitudes-to-aviation-noise Our Comments We suggest that the footnote should also reference the recently published NORAH (available here: The Airports Commission s assessment was based on indicative flight path designs, which the Government considers to be a reasonable approach at this stage in the process. Precise flight path designs can only be defined at a later stage after detailed airspace design work has taken place. This work will need to consider the various options available to ensure a safe and efficient airspace which also mitigates the level of noise disturbance. Once the design work has been completed, the airspace proposal will be subject to extensive consultation as part of the separate airspace decision making process established by the Civil Aviation Authority. after detailed airspace design work has taken place. This work will need to consider the various options available to ensure a safe and efficient airspace which also mitigates the level of noise disturbance. Once the design work has been completed, the airspace proposal will be subject to extensive consultation as part of the separate airspace decision making process established by the Civil Aviation Authority. As noted in our May 2017 submission, we suggest that the NPS should do more to clarify to the Examining Authority and all stakeholders that final flightpaths will not be available at the DCO stage. We therefore suggest that additional text be added to this paragraph as follows: Precise flight path designs will not be finalised or examined through the DCO process. Precise flight path designs can only be defined at a later stage after detailed airspace design work has taken place, and will be authorised as part of the separate airspace change decision making process established by the Civil Aviation Authority. This subsequent detailed design work will need to consider the various options available to ensure a safe and efficient airspace which also mitigates the level of noise disturbance. Once the design work has been completed, the airspace proposal will be subject to extensive consultation and environmental assessment as part of the separate airspace decision making process. For the Development Consent Order, the applicant will need to provide enough information on likely future flight paths to undertake an environmental impact assessment, which may involve the use of indicative or prototype flight paths to assess the likely significant effects of the three runway airport but which will not fix the final flight path designs. The Secretary of State will not impose requirements as part of the Development Consent Order which risk undermining subsequent or parallel decisions under other statutory or regulatory noise control regime, such as the airspace change process. 73

76 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments 5.50 The Airports Commission concluded that expansion at Heathrow must be taken forward with a firm guarantee that the airport and its airlines will be held to the very highest standards of noise performance. In addition, the Airports Commission stated The Airports Commission concluded that expansion at Heathrow must be taken forward with a firm guarantee that the airport and its airlines will be held to the very highest standards of noise performance. In addition, the Airports Commission stated that the airport should not be allowed to expand without appropriate conditions being put in place in respect of its noise impacts. 137 impacts Noise management at airports where a noise problem has been identified is subject to the concept of a Balanced Approach, referred to above. EU Regulation 598/2014, which adopts the Balanced Approach, 139 Approach, 150 also lays down a procedure for the adoption of noise-related operating restrictions, in particular a requirement for prior consultation The applicant should show how the project has taken advantage of and maximised opportunities to conserve biodiversity and geological conservation interests. As noted in our May 2017 submission, it would be appropriate for the Government to confirm whether it endorses the two points made in the Airports Commission s report and recited here and, if so, to either indicate which of the measures in the following paragraphs are intended to secure those two points or to simply state This has been taken into account with the Airports NPS in the following paragraphs at the end of this paragraph Alternatively, if Government has no particular view on these two points, this paragraph could reasonably be deleted to avoid any confusion. As noted in our May 2017 submission, guidance from the Secretary of State would be useful on the interaction between consultation and approval under the DCO and consultation and approval of "operating restrictions" pursuant to EU Regulation 598/2014. As set out in our May 2017 submission, we note the obligation in this paragraph on the applicant to show how the project has taken advantage of and maximised opportunities to conserve biodiversity and geological conservation interests. We note that whilst there is expected to be a net biodiversity gain in connection with the Northwest Runway, there will necessarily be some loss of habitat and biodiversity in certain areas required to deliver the project. The NPS could usefully recognise that. The reference to maximising opportunities to "conserve" could potentially be seen as cutting across this requirement. Heathrow is also concerned that the reference to "maximising" opportunities in relation to biodiversity and geological conservation interests could be seen as at odds with other aspects of the document as it would suggest that conserving biodiversity at the cost of 74

77 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments 5.94 Compensation ratios relating to the effects of the preferred scheme should be considered in more detail during the design. The application of 2:1 compensation ratio is considered to represent the minimum requirement. However, there are other mechanisms for establishing compensation ratios, such as Defra s biodiversity offsetting metric. Equally, it is important to note that habitat ratios form only one part of potential compensation which should be considered, and the location and quality of any compensation land is of key importance. In this regard, habitat creation, where required, should be focused on areas where the most ecological and ecosystems services benefits can be realised The proposed development comprised in the preferred scheme should provide many opportunities for building in beneficial biodiversity as part of good design. When considering proposals, the Secretary of State will consider whether the applicant has maximised such opportunities in and around developments, and particularly to establishing and enhancing green infrastructure. The Secretary of State may use requirements or planning obligations where appropriate in order to ensure that such beneficial features are delivered. another receptor should be prioritised. The current wording may make this element difficult to achieve in light of the large scale trade-offs between different types of receptors. As set out elsewhere, using maximise as a policy test is not appropriate. As in our May 2017 submission, we request that the NPS be amended to refer to a compensation ratio defined by an appropriate biodiversity offsetting metric based on that formulated by Defra, and agreed with Natural England, and that the specific reference to a 2:1 ratio is removed from the NPS. The application of an appropriate biodiversity offsetting metric, such as that formulated by Defra, is helpful but not determinative. We are aware that this metric is being used in the context of other major infrastructure projects within the area. Equally, it is important to note that offsetting metrics form only one part of the potential compensation which should be considered. Habitat creation, where required, should be focused on areas where the most ecological and ecosystems services benefits can be realised. The wording should allow for this to be developed and the ratio removed. As outlined in our previous submission, we note that opportunities to maximise beneficial biodiversity must be considered in light of information and requirements regarding aircraft safety. It could be difficult to demonstrate compliance with the requirement to "maximise" opportunities for green infrastructure, as it is vague and open ended. The use of the word maximise could also be seen as inconsistent with other aspects of the document, as it suggests that opportunities for building in beneficial biodiversity should take precedence over other considerations in the context of good design and enhanced green infrastructure 75

78 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments Green Belts, defined in a development plan, are situated around certain cities and built up areas, including London. The fundamental aim of Green Belt policy is to prevent urban sprawl by keeping land permanently open. The essential characteristics of Green Belts are their openness and their permanence. Further information on the purposes and protection of Green Belt is set out in the National Planning Policy Framework. 160 Framework Best and most versatile agricultural land is land which is most flexible, productive and efficient in response to inputs and which can best deliver future crops for food and non-food uses such as biomass, fibres and pharmaceuticals. The National Planning Policy Framework sets out how local planning authorities should take into account the economic and other benefits of best and most versatile agricultural land. 161 land. 174 Planning practice guidance for the natural environment provides additional guidance on best and most versatile agricultural land and soil issues. Please see our detailed commentary on the issue of Green Belt in Section 5.8 of the main body of our response. As set out in our response in May 2017, the terms in which this paragraph are currently drafted give rise to a lack of clarity in relation to the application to the north west runway scheme of extant planning policy, as referenced in paragraph 112 of the NPPF, on the use of best and most versatile agricultural land for development. This policy requires the application of a sequential test, in which poorer quality agricultural land is required to be used before, and in preference to, higher quality agricultural land, including in particular best and most versatile agricultural land. However, the NPS paragraph does not acknowledge or address the fact that the draft NPS is site specific by reference to the Government's 'preferred scheme'. As a result, the application of the sequential test is necessarily constrained on several levels. For instance, any consideration of 'alternative' sites is precluded, such that the sequential test can only be applied within the context of the preferred scheme. This limited flexibility will likely be further constrained by the need for the promoter to strike a balance between safeguarding the long-term potential of best and most versatile agricultural land on the one hand, and, on the other, delivering green infrastructure elements of the scheme, such as community and biodiversity provision, and potentially also other forms of mitigation. If this paragraph was drafted in slightly different terms, the issue could potentially be settled prior to any application for development consent 76

79 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments being submitted under the Planning Act For instance, it would be preferable for the NPS: to acknowledge the constraints arising from its site specific nature (in connection with the Northwest Runway scheme) and to state that the development of any agricultural land (including best and most versatile agricultural land) in connection with the delivery of the north west runway scheme is 'necessary', for the reasons identified in sections 2 and 3 of the NPS and in the Airports Commission's Report (July 2015); and to confirm that the use of agricultural land (including where necessary best and most versatile agricultural land) for the purposes of the preferred scheme is acceptable, subject to the application of the sequential test within the context of the north west runway scheme and on a basis which also takes into account the potential need for agricultural land to be adapted for use for other purposes, such as the provision of green infrastructure and other mitigation. In addition, it would be helpful if this NPS paragraph (or a footnote to it) set out the definition of 'best and most versatile agricultural land' (as provided in the NPPF - Annex 2: Glossary) Development of land will affect soil resources, including physical loss of and damage to soil resources, through land contamination and structural damage. Indirect impacts may also arise from changes in the local water regime, organic matter content, soil biodiversity and soil process. It would also be helpful if a footnote was added to this paragraph, to reference the "Planning practice guidance for the natural environment", i.e. " Paragraph: 026 Reference ID: ; Revision date: ". The comments set out above in relation to paragraph are also applicable to this paragraph, in terms of the potential effects of development on soil resources and the acceptability of that. 77

80 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments Existing open space, sports and recreational buildings and land should not be developed unless the land is surplus to requirements no longer needed or the loss would be replaced by equivalent or better provision in terms of quantity and quality in a suitable location. If the applicant is considering proposals which would involve developing such land, it should have regard to any local authority s assessment of need for such types of land and buildings The general policies controlling development in the countryside apply with equal force in Green Belts but there is, in addition, a general presumption against inappropriate development within them. Such development should not be approved except in very special circumstances which are already the subject of Government guidance. 164 Footnote guidance. 177 The applicant should therefore determine whether the proposal, or any part of it, is within an established Green Belt and, if so, whether its proposal may be considered inappropriate development within the meaning of Green Belt policy. Metropolitan Open Land and land designated a Local Green Space in a local or neighbourhood plan are subject to the same policies of protection as Green Belt, and inappropriate development should not be approved except in very special circumstances The applicant should take into account the economic and other benefits of best and most versatile agricultural land. Where significant development of agricultural land is demonstrated to be necessary, the applicant should seek to use areas of poorer quality land in preference to that of a higher quality. The applicant should also As noted in our May 2017 submission, similarly to paragraphs and above, the NPS could do more to recognise inevitable impacts of the new runway, which are already understood, rather than providing standard, generic policy tests. Please see our detailed commentary on Green Belt in Section 5.8 of the main body of our response. As set out in our May 2017 response, the footnote contains a reference to a paragraph which appears not to exist. In the relevant online guidance ("Housing and economic land availability assessment") referenced by the link, the paragraph numbers stop at 043. There is no paragraph 044. The reference should therefore be clarified or corrected. The comments set out above in relation to paragraphs are also applicable to this paragraph, in terms of the application of the sequential test for the use of agricultural land for new development. 78

81 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments identify any effects, and seek to minimise impacts, on soil quality, taking into account any mitigation measures proposed. For developments on previously developed land, the applicant should ensure that they have considered the risk posed by land contamination and how it is proposed to address this The applicant should safeguard any mineral resources on the proposed site for the preferred scheme as far as possible. As noted in our May 2017 submission, it is not clear from paragraph whether the minerals safeguarding policies in the relevant Local Plan or Development Plan for the area should apply, setting the test to be met by the applicant in this regard, or whether the minerals safeguarding policies set out in those documents are effectively superseded by the general requirement in paragraph We note that section 104 of the Planning Act 2008 provides that a decision whether or not to grant a DCO application must be taken in accordance with any relevant NPS. However, it is not clear whether the detail of the policies in the relevant Local Plan or Development Plan are applicable. We think it is important that the NPS is clearer as to what will be required of the applicant in relation to minerals safeguarding. In this context we note that Local Plan policies on minerals safeguarding often set out circumstances in which prior extraction of minerals will not be required, and may set out other exemptions in relation to the safeguarding of mineral resources. These exemptions may be targeted at a community level, allowing the policy to be overridden where the community need for the development outweighs the need to safeguard the minerals in question (such as is the case in the London Borough of Hillingdon Local Plan). We think it is important that the requirements in terms of minerals safeguarding in the NPS reflect the nationally significant nature of the Northwest Runway scheme and the national need for new airport capacity in the South East. As such we would submit that paragraph should make clear precisely what will be required of an applicant in terms of minerals safeguarding, and in particular should make clear whether minerals policies in relevant Local Plans or Development Plans apply in the context of appraisal of the Northwest Runway scheme. 79

82 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments If it is considered appropriate to apply such policies, we think it is important that the NPS also sets out appropriate exemptions from the requirement to safeguard mineral resources, recognising the nationally significant nature of the Northwest Runway scheme, and the fact that it should not be prevented from going ahead due to issues associated with minerals safeguarding. The terms in which this paragraph are currently drafted raise and leave unresolved an issue in relation to minerals safeguarding policy, which, if the paragraph was drafted in different terms, could potentially be settled prior to any application for development consent being submitted. As currently drafted, NPS paragraphs and suggest that minerals within the area of the new runway should be safeguarded (although, as set out above, the means by which such safeguarding should occur is not clearly set out in the NPS). We are concerned that the location of the scheme, and the use that will need to be made of land at that location in order to deliver the Government s preferred scheme, will necessarily constrain the ability to safeguard minerals in certain areas at least (e.g. beneath the area proposed to be used for the third runway itself). In these circumstances, it would be logical for the NPS paragraph to set out that minerals in the land required to be used to deliver the Northwest Runway scheme: would not be required to be safeguarded, or to be subject to any otherwise applicable minerals safeguarding policy (either at national or local level), where it was impracticable or not reasonably feasible for them to be subject to such safeguarding for reasons related to the delivery of the new runway scheme. We submit that this is a justified approach, on the basis that the Northwest Runway scheme constitutes nationally significant infrastructure required to address national need and being in the public interest, thereby outweighing the need 80

83 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments for the particular minerals affected to be safeguarded. We would therefore propose the following amendment to this paragraph: Where the preferred scheme has an impact on a mineral safeguarding area, the Secretary of State must ensure that the applicant has put forward appropriate mitigation measures to safeguard mineral resources. The applicant should safeguard any mineral resources on the proposed site for the preferred scheme as far as is reasonably practicable and feasible in the context of the proposed scheme, taking into account relevant constraints in relation to location and layout of key infrastructure. Considerations of whether minerals require to be safeguarded should also take into account the nature of the scheme as nationally significant infrastructure meeting a nationally identified need possible. We note that the only effective mitigation measures available for safeguarding mineral resources in the context of the north west runway scheme would be: to not develop over them (so as to ensure their continuing availability for use); or to extract them prior to or during construction of the north west runway scheme. There are likely to be areas of mineral resources (including, potentially, designated Minerals Safeguarding Areas) over which it will be necessary to develop in order to deliver the north west runway scheme. Unfortunately, it is not expected to be appropriate, practicable or feasible in all such cases to extract the mineral resources in question prior to or during construction of the north west runway scheme, though Heathrow will be looking to maximise such opportunities where appropriate and practicable. In particular, in some cases extracting the minerals in question would result in the creation of a void beneath the proposed site for development, which would then require to be backfilled with similar engineered construction materials prior to construction of the development. This would effectively negate the purpose and value of extracting the minerals in the first place, and would also likely result in significantly increased vehicle movements and increased impacts in terms of noise and air quality during the construction phase, for no net gain, and no 81

84 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments discernible benefit in practice. Please see our comments at paragraph 5.115, which apply equally in relation to MSAs, in which we request that: the NPS is clearer as to what will be required of the applicant in relation to providing mitigation to safeguard minerals in MSAs; it is made it clear whether or not MSA policies in relevant Local Plans or Development Plans would apply in the context of this NPS and the NWR scheme; appropriate exemptions are set out from the requirement to safeguard minerals in MSAs. We would therefore suggest the following amendment to this paragraph: When located in the Green Belt, projects may comprise inappropriate development. Inappropriate development is by definition harmful to the Green Belt and there is a presumption against it except in very special circumstances. The Secretary of State will need to assess whether there are very special circumstances to justify inappropriate development. Very special circumstances will not exist unless the potential harm to the Green Belt by reason of inappropriateness, and any other harm, is clearly outweighed by other considerations. In view of the presumption against inappropriate development, the Secretary of State will attach substantial weight to the harm to the Green Belt, when considering any application for such development. The Secretary of State may require the provision of replacement "Where the preferred scheme has an impact on a mineral safeguarding area, the Secretary of State must ensure that the applicant has put forward appropriate such mitigation measures to safeguard mineral resources as are reasonably practicable and feasible in the context of the proposed scheme, taking into account relevant constraints in relation to location and layout of key infrastructure. Considerations of whether minerals require to be safeguarded should also take into account the nature of the scheme as nationally significant infrastructure meeting a nationally identified need." The wording in this paragraph which states that the applicant may be required to provide replacement Green Belt land would (if retained) create a number of practical difficulties for the applicant and the decision maker. We outline these difficulties in more detail in our full response at Section 5.8, and respectfully suggest that this requirement is removed from the NPS. 82

85 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Green Belt land, which should be secured by the applicant. Our Comments The Government recognises the role of the Lakeside Energy from Waste plant in local waste management plans. The applicant should make reasonable endeavours to ensure that sufficient provision is made to address the reduction in waste treatment capacity caused by the loss of the Lakeside Energy from Waste plant. We welcome the reference to waste treatment capacity in this paragraph, which helpfully recognises the scope for the commercial waste market to respond to displaced treatment capacity The Secretary of State will consider the extent to which the applicant has proposed an effective process that will be followed to ensure effective management of hazardous and non-hazardous waste arising from the all stages of the lifetime of the development. The Secretary of State should be satisfied that the process set out provides assurance that: Waste produced will be properly managed, both onsite and offsite; The waste from the proposed development can be dealt with appropriately by the waste infrastructure which is, or is likely to be, available. Such waste arising should not have an adverse effect on the capacity of existing waste management facilities to deal with other waste arising in the area; and Adequate steps have been taken to minimise the volume of waste arising, and of the volume of waste arising sent to disposal, except where an alternative is the most sustainable outcome overall. As noted in our May 2017 submission, it is important to recognise the nature of the commercial waste market, which can make it difficult to judge the issue of capacity within a specific geographical area at a specific point in time, noting that many facilities within the area of the scheme accept waste from outside the area where commercial considerations and disposal rates make this viable (or even preferable). We will provide assurance in our DCO application that the waste generated during the construction phase of the scheme can be appropriately dealt with by waste management infrastructure which is or which is likely to be available. We are of the opinion that it would be helpful if this section of the NPS expressly recognised that the scale of project (as with all other runway development schemes) has the potential to generate significant volumes of material during the construction phase, some of which may require disposal in off-site facilities, which will inevitably impact on or consume a volume of capacity within the area to some extent, which could be perceived as an adverse effect on the capacity of existing waste management infrastructure. We would suggest that the relevant text could be re-phrased as follows: 83

86 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement The surface water drainage arrangements for any project should be such that the volumes and peak flow rates of surface water leaving the site are no greater than the rates prior to the proposed project, taking into account climate change, unless specific off-site arrangements are made and result in the same net effect. The Secretary of State will need to be satisfied that a proposal has had regard to the Thames river basin management plan and the requirements of the Water Framework Directive and its daughter Directives, including those on priority substances and groundwater. In terms of Water Framework Directive compliance, the overall aim of development should be no deterioration of ecological status in watercourses, ensuring that Article 4.7 of the Water Framework Directive Regulations does not need to be applied. If Article 4.7 does need to be applied, and the conditions set out apply to airport development, the applicant must set out and report any modifications to the physical characteristics of surface water bodies or alterations to levels of groundwater bodies in the Thames river basin management plan. Our Comments "The project should not result in unreasonable constraints on the ability of other waste generators to dispose of other waste arising within the area." This would better take into account the scale of the project as compared with other projects and the challenge that managing those waste arisings requiring off-site disposal during the construction phase will represent. We repeat the submissions made in our previous response in May 2017 that this paragraph should make explicit reference to the design life of a scheme. This will ensure that no concerns are raised at a later stage. We consider that there is the potential for unintended ambiguity in the context of this paragraph, in relation to what infrastructure may be within the scope of an application for Article 4.7 derogation under the Water Framework Directive. It is our view that this paragraph is not intended to prescribe the infrastructure in respect of which an application for derogation under Article 4.7 could be made. Article 4.7 itself sets a high bar to ensure that the benefits of a derogation outweigh the benefits of maintaining the status of the waterbody in question. However, we think there is scope for ambiguity based on the reference to airport development, and would therefore suggest that this is amended as follows: The Secretary of State will need to be satisfied that a proposal has had regard to the Thames river basin management plan and the Water Framework Directive and its daughter Directives, including those on priority substances and groundwater. In terms of Water Framework Directive compliance, the overall aim of development should be no deterioration of ecological status in watercourses, aiming to ensureing that Article 4.7 of the Water Framework Directive Regulations does not need to be applied. However, if Article 4.7 does need to be applied, and the conditions in it are met by 84

87 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments set out apply to airport development the proposed development, the applicant must set out and report any modifications to the physical characteristics of surface water bodies or alterations to levels of groundwater bodies in the Thames river basin management plan Some heritage assets have a level of significance that justifies official designation. Categories of designated heritage assets are: World Heritage Sites; Scheduled Monuments; Listed Buildings; Protected Wreck Sites; Protected Military Remains; Registered Parks and Gardens; Registered Battlefields; and Conservation Areas. 189 Areas. 202 Where the proposed development will lead to substantial harm to or the total loss of significance of a designated heritage asset, the Secretary of State will refuse consent unless it can be demonstrated that the substantial harm or loss of significance is necessary in order to deliver substantial public benefits that outweigh that loss or harm, or alternatively that all of the following apply: The nature of the heritage asset prevents all reasonable uses of the site; No viable use of the heritage asset itself can be found in the medium term through appropriate marketing that will enable its conservation; Conservation by grant funding or some form of charitable or public ownership is demonstrably not possible; and The harm or loss is outweighed by the benefit of bringing the site back into use. Where appropriate, the Secretary of State will impose requirements to the development consent order to ensure that the work is undertaken in a timely manner, in accordance with a written As set out in our May 2017 response, Protected Military Remains are not included within the list of designated heritage assets for the purposes of the National Planning Policy Framework, and it is inappropriate for the NPS to make reference to them. This is, however, an example of a paragraph that could more transparently recognise that the construction of the new runway and its associated development will inevitably have impacts on heritage assets. As outlined in our previous submission in May 2017, although this paragraph replicates the NPPF, the Airports NPS sets out the need for the Northwest Runway and acknowledges the clear public benefit. As such we would like to see the Airports NPS take the heritage assessment one step further and expressly acknowledge that the substantial public benefit of the scheme for the purpose of this test outweighs the likely extent of heritage impacts as identified in the Appraisal of Sustainability. This text could also recognise the inevitably of impacts, the in-principle acceptability of which have already been considered in the preparation of the NPS and the selection of the Northwest Runway scheme. Given the nature of the development to be considered under the Airports NPS, it seems unlikely that any of the 4 bullets set out could arise or that they are the appropriate tests in this case. As outlined in our May 2017 submission, we think it would be helpful to clarify some of the terminology used in various instances in this paragraph, as we remain concerned that this is unclear and could be difficult to demonstrate 85

88 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement scheme of investigation that meets the requirements of complies with the policy in the Airports NPS and has been agreed in writing with the relevant local authority, and that the completion of the exercise is properly secured. The assessment should include the visibility and conspicuousness of the preferred scheme during construction and the presence and operation of the preferred scheme and potential impacts on views and visual amenity. This should include any noise and light pollution effects, including on local amenity, tranquillity and nature conservation. In taking decisions, the Secretary of State will consider whether the preferred scheme has been designed carefully, taking account of environmental effects on the landscape and siting, operational and other relevant constraints, to avoid adverse effects on landscape or to minimise harm to the landscape, including by reasonable mitigation. Our Comments delivery against. The reference to the "work" being undertaken in the second line should be explained in order that it is absolutely clear what that "work" relates to. Similarly, the reference to "a written scheme of investigation" should be expanded upon; this is the only time that such an investigation is referred to in the NPS. Finally, the last sentence ('the completion of the exercise is properly secured') should also be redrafted to remove any uncertainty. It is not obvious what "the exercise" being referred to is and likewise the reference to it being "properly secured"'. As outlined in our May 2017 submission, we have some concerns about the scope of the matters identified in this paragraph for inclusion in the assessment of landscape and visual impacts. Noise and light pollution effects are not generally considered to be matters for landscape and visual impact assessment; rather, they would be assessed in relevant chapters of the environmental statement (e.g. noise, ecology, landscape and visual impacts, and cumulative effects, as appropriate). The word any in the last sentence should be qualified as any significant. As set out in our previous submission, the expectation of avoiding adverse effects takes insufficient account of the known characteristics of the scheme, whilst the requirement to minimise harm is subject to the same comments as we have made where similar wording is used elsewhere in the draft. Instead, the policy requirements should relate to high standards of design, the limiting of impacts and their mitigation and compensation where practical. 86

89 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement A preliminary assessment of ground instability should be carried out at the earliest possible stage before a detailed application for development consent is prepared. The applicant should ensure that any necessary investigations are undertaken to confirm that their sites are and will remain stable, or can be made so as part of the development. The site needs to be assessed in the context of surrounding areas where subsidence, landslides and land compression could threaten the development during its anticipated life or damage neighbouring land or property. This could be in the form of a land stability or slope stability risk assessment report. If development consent is granted for a project, the Secretary of State should consider whether there is a justification for all of the authorised project (including any associated development) being covered by a defence of statutory authority against nuisance claims. If the Secretary of State cannot conclude that this is justified, then the defence should be disapplied, in whole or in part, through a provision in the development consent order. A number of statutory protections are provided in these areas, and the applicant must fulfil its statutory duties in a timely and efficient manner. Our Comments The NPS should recognise that as part of a preliminary assessment of ground instability, sufficient investigations will be undertaken to come to an appropriate view on land stability and/or the ability to make land stable, however, there will be an on-going need for further detailed investigations after DCO grant. It would be helpful if the text in this paragraph reflected this fact where it refers to investigations needed to confirm site stability, so that it is clear that (as is usual) further investigations will be needed for e.g. foundation design. It is usual for the defence of statutory authority against nuisance claims to be included in development consent. If this paragraph of the NPS is seeking to disapply the usual regime in certain circumstances, then it should provide guidance on the specific circumstances in which the defence of statutory nuisance would not be preserved. We consider that it is important to preserve the defence of statutory authority unless there are compelling reasons for not doing so. As such, it is important that the NPS is clear on this point. We remain concerned that the wide/vague terms in which this NPS paragraph is drafted could lead to difficulties for a decision maker in determining whether or not an applicant had achieved compliance. We would therefore suggest that the paragraph be deleted In addition to statutory requirements, Heathrow Airport has publicly committed to a community compensation package comprising a number of more generous offers: To pay 125% of market value, plus taxes and reasonable moving costs, for all owner occupied homes within the compulsory acquisition zone; To pay 125% of market value, plus taxes and reasonable moving costs, for all owner occupied We suggest the following changes to the third, fourth and fifth bullet points in this paragraph: Following a third party assessment, to provide full acoustic insulation for residential property within the full single mode easterly and westerly single mode 60dB LAeq (16 hr) 200 noise contour of an expanded airport in 2040; Following a third party assessment, to provide a contribution of up to 3,000 for acoustic insulation for residential properties within the full single mode easterly and westerly 57dB LAeq 87

90 Para Number Revised Original Footnote 214 Combined (Revised and Original) Paragraphs of Airports National Policy Statement homes within an additional voluntary purchase / acquisition zone incorporating the area known as the Heathrow Villages; Following a third party assessment, to provide full acoustic insulation for residential property within the full 60dB LAeq 200 single mode easterly and westerly 60dB LAeq (16 hr) 213 noise contour of an expanded airport; Following a third party assessment, to provide a contribution of up to 3,000 for acoustic insulation for residential properties within the full single mode easterly and westerly 57dB LAeq (16hr) or the full 55dB Lden 201 Lden 214 noise contours of an expanded airport, whichever is the bigger; and To deliver a programme of noise insulation and ventilation for schools and community buildings within the 60dB LAeq (16 hour) contour. 202 contour. 215 To deliver a programme of noise insulation and ventilation for schools and community buildings within the 60dB LAeq (16 hour) contour.202contour.215 Lden is the 24 hour LAeq calculated for an annual period, but with a five decibel weighting for evening and a ten decibel weighting for night to reflect people s greater sensitivity to noise within these periods Our Comments (16hr) or the full 55dB Lden201 noise contours of an expanded airport, whichever is the bigger either the full easterly and westerly single mode 57dB LAeq (16hr) or the annual average 55dB Lden 214 noise contours of an expanded airport in 2040, whichever is the bigger; and To deliver a programme of noise insulation and ventilation for schools and community buildings within the 60dB LAeq (16 hour) contour within the average 60dB LAeq (16 hour) contour of an expanded airport in " We suggest the following addition to this footnote: "Lden is the 24 hour LAeq calculated for an annual period, but with a five decibel weighting for evening and a ten decibel weighting for night to reflect people s greater sensitivity to noise within these periods. The Lden metric as applied to Heathrow Airport Limited's proposal is for average mode conditions." 88

91 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement The Airports Commission suggested this should take the form of a national noise levy paid for by passengers. The Government does not consider a national levy appropriate, but supports the development of a community compensation fund at an expanded Heathrow Airport. The Government expects that the size of the community compensation fund will be proportionate to the environmental harm caused by expansion of the airport. The Government notes that, in its consideration of a noise levy, the Airports Commission considered that a sum of 50 million per annum could be an appropriate amount at an expanded Heathrow Airport, and that, over a 15 year period, a community compensation fund could therefore distribute 750 million to local communities. The applicant should seek to minimise impacts on local people, to consult on the details of its works, and to put them in place quickly. The Government also looks to the applicant to consult on the detail of a community compensation fund. Our Comments In order to appropriately manage expectations for any such fund, we suggest that this paragraph should more clearly outline the scope of the proposed fund as envisaged by the Airports Commission, i.e. to support: a wide range of community mitigation and compensation measures enhanced noise insulation and other schemes, including support for schools measures which help to reduce or avoid negative effects, or redress the harm caused by such effects In respect of the scale of the fund, it should be noted that the Airports Commission referred to 50 million as an illustrative example only, and did not suggest over what period such a fund might be made available. It is therefore potentially inappropriate and misleading to acknowledge this as an appropriate amount when subsequent paragraphs then require the applicant to consult on the scale and duration of the fund through the planning process. The second part of this paragraph should therefore be deleted. Again, the word "minimise is inappropriate as a policy test and should be qualified There will be many opportunities for communities to engage as expansion is taken forward. The Government is required to consult on and publicise the Airports NPS, and the applicant is subject to pre-application consultation requirementsduties. Additional consultations on issues such as airspace change, overseen by the Civil Aviation Authority, will take place outside of the planning process. Ongoing engagement will also be required as the applicant takes forward its compensation package. To further aid community understanding, we suggest that this paragraph could expressly state that airspace change is the process which determines flight path routes. 89

92 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement The Government is committed to helping people into jobs and improving the skills of the UK workforce, with a target of three million new apprenticeships being created in the current Parliament. 204 Parliament. 217 Continuing to create jobs and new training opportunities will help to consolidate the national economic recovery, put the UK on the path to full employment and raise the nation s productivity. Apprenticeships have an essential role to play within this work, helping individuals to develop key skills which will benefit both them and employers. The Government notes that, with expansion, Heathrow Airport has publicly committed to creating ensuring 10,000 apprenticeships before 2030, thereby doubling the number offered currently available at the airport. 208 and in its supply chain and airport-related businesses. 221 The Government expects the applicant to maximise the employment and skills opportunities for local residents, including apprenticeships. The Secretary of State will consider whether Heathrow Airport has set out a credible plan to implement its commitment to deliver 10,000 apprenticeships at an expanded airport. Our Comments We suggest that given the long-term role and status of national policy statements under the Planning Act 2008, wording which will not date should be used here (e.g. we would remove the reference to the current Parliament ). We welcome the clarification in this paragraph that the apprenticeship numbers will include new apprenticeships beyond the physical confines of the airport. However, we do not consider the change from "offered" to "currently available" accurately reflects the proposal. The 5,000 figure, which is being doubled, also relates to the number of apprenticeships in the period up to 2030, not to the current number of apprenticeships. We therefore recommend the word "currently" should be removed. As outlined in our previous submission, the reference to "maximising" the employment and skills opportunities for local residents is open to interpretation and does not set out a clear test for the applicant to demonstrate it has met. It could therefore be difficult for an applicant to demonstrate that it has delivered this requirement. We note that paragraphs have been updated to recognise the broader nature of the apprenticeship proposal i.e. it is not limited to apprenticeships 'at' the airport. To mirror the changes above and ensure that decision making reflects the applicant's requirements, we request that this paragraph is amended as follows: " The Secretary of State will consider whether Heathrow Airport has set out a credible plan to implement its commitment to deliver a total of 10,000 apprenticeships at an expanded airport, 90

93 Para Number Revised Original Combined (Revised and Original) Paragraphs of Airports National Policy Statement Our Comments in its supply chain and in airport-related businesses" Annex A Annex B Please see our detailed commentary on the issue of flexibility in Section 5.6 of our main submission. Please see our detailed commentary on the issue of flexibility in Section 5.6 of our main submission. 91

94 Appendix 2 Habitats Regulations Assessment Introduction 1.1 The technical information and preliminary assessment contained in this Appendix has been produced by consultant ecologists working for Wood Plc, who are appointed by HAL, to provide further comfort that the likely outcome of the project level Habitats Regulations Assessment (HRA) for Heathrow expansion will be a conclusion of no adverse effect on integrity of any European sites. 1.2 The information is grouped using similar topic headings and in the same order used in sections 4 to 8 of the revised HRA (rhra) for the revised draft NPS, namely: Effect(s) of disturbance (construction and operation) Effect(s) of operational management (bird strike) Effect(s) of habitat loss and fragmentation Effect(s) of change to air quality Effect(s) of changes to water quality and quantity. 1.3 Table 2.1 provides a high level summary of the information we set out in greater detail in the following section below. Potential Effect Preliminary Conclusion Justification Disturbance Construction No adverse effect on the integrity of the South West London Waterbodies (SWLW) SPA Current information on layout and the relative location of the SWLW SPA suggests that the potential areas that may be affected by disturbance during construction represent only a small proportion of the total. Established mitigation measures, which have been agreed for other NSIPs, are available to manage any such disturbance, should they be required. Disturbance No adverse effect on the Survey data gathered to 3

95 Operation Operational Management Bird Strike Effects of Direct and Indirect Habitat Loss and Fragmentation on Habitats and Functionally Linked Habitats Air quality Effects of Changes to Water Quality and Quantity integrity of the SWLW SPA No adverse effect on the integrity of the SWLW SPA No adverse effect on the integrity of the SWLW SPA No adverse effect on the integrity of any European site. No adverse effect on the integrity of the SWLW SPA date by Heathrow demonstrates that the potential for gadwall and shoveler to be disturbed by aircraft is minimal as habituation is already operating. The potential for disturbance of gadwall and shoveler on Queen Mother Reservoir can be discounted due to the very low numbers of those species present on this water body (from survey data) and the lack of a need identified to disperse birds from this location. All design options being progressed ensure that there will be no direct loss of habitat within the SWLW SPA. Established mitigation measures are available for any indirect effects on functional habitat. The commitment of no more Heathrow related traffic on the roads than today and the transport mode share figures that Heathrow will need to achieve (as required by the revised draft NPS) suggest that there will be no effects on the integrity of European sites due to alterations in air quality. The maintenance of water quality and water flow downstream of the airport will ensure that there will not be any effects on the integrity of the SWLW 93

96 Table 2.1: Summary of Effects, Conclusions and Justifications SPA due to changes in water quality or quantity. Further technical information regarding preferred scheme Disturbance Construction 1.4 Overall, disturbance of the designated features (gadwall or shoveler) of the South West London Waterbodies (SWLW) Special Protection Area (SPA) during the construction phase of Heathrow expansion through the creation of aural and/or visual stimuli from the use of plant and presence of engineers is considered unlikely. The factors which are considered to point to this likely conclusion are set out below. 1.5 The location of the preferred scheme relative to the location of the Reservoirs and flooded gravel pits used by gadwall and shoveler mean that construction activity is unlikely to cause disturbance to gadwall or shoveler across the majority of habitats within the SWLW SPA or the habitats with which it is functionally linked. This is because construction disturbance tends to manifest over relatively short distances only (for example, a construction disturbance zone of 250m for shoveler and gadwall was accepted by Natural England and the Secretary of State for the North London (Electricity) Reinforcement Project based, in part, on research by Cutts, Phelps and Burdon 2009) and is more pronounced when birds can both see and hear the source of the stimuli. Using the illustrative masterplan shown in Annex B of the Revised NPS, if a 250m construction disturbance zone is applied then only approximately 2.5% of the SWLW SPA may potentially be subject to construction disturbance (note this assumes on a precautionary basis that construction in all areas within 250m of the SPA would occur simultaneously). 1.6 For birds roosting, feeding or loafing on the reservoirs that may be subject to construction disturbance the banked nature of the reservoir wall is likely to restrict disturbance to the perception of noise only. Further, the potential for construction noise to cause disturbance to gadwall and shoveler can be considered limited because perception of the noise generated will be relatively limited due to the already noisy baseline environment (e.g. aircraft noise over Wraysbury Reservoir is regularly in excess of 80 db, which is louder than typical construction plant outputs). 94

97 1.7 Further detailed information on (i) construction locations, (ii) scheduling (i.e. does the disturbance occur over-winter when the designated features are present), (iii) activity type (e.g. its potential to create sounds of varying power) and (iv) mitigation (e.g. sound screening) will be provided in the DCO application for Heathrow expansion. However, such information and measures can be expected, with a high degree of confidence at this stage, to reduce any potential disturbance events to a level where no adverse effects on the integrity of the SWLW SPA would be predicted. For example, mitigation measures for gadwall and shoveler, to account for construction disturbance within the Lee Valley SPA during the North London Reinforcement Project, were successfully agreed between National Grid and Natural England, demonstrating in principle that successful mitigation is possible for these species within the construction phases of Nationally Significant Infrastructure Projects. 1.8 The potential for the construction workforce, that is expected to temporarily reside in the area in purpose-managed accommodation, to cause increased levels of recreational disturbance to gadwall and shoveler, is also considered unlikely. This is because daylight hours during the months when gadwall and shoveler numbers begin to increase, peak and then decrease (i.e. October through February) are highly restricted and coincide with a typical working day. Consequently, the potential for construction workers to recreate in areas and at times that may give rise for potential for disturbance is restricted due to darkness, especially as such areas are not well lit. It can also reasonably be assumed that a proportion of staff not working during the weekend are likely to return to their home base. 1.9 Furthermore, few of the seven water body aggregations designated as part of the SWLW SPA or its functionally linked habitat are publicly accessible (two of seven have Public Rights of Way through or adjacent to them). The two Public Rights of Way most accessible are between Staines North and Staines South Reservoirs and through the lakes south of Horton. Only at the former is there the opportunity to park vehicles to gain access to the footpath. This most likely restricts access for construction workers temporarily located in the area to a footpath that is not part of a circular route (other than by following the A3044) and would appear (based on observations from surveyors) to be used mainly by dog walkers/joggers from the village of Stanwell or bird watchers It is therefore considered likely that a conclusion of no adverse effects on the integrity of the SWLW SPA associated with increased levels of recreational disturbance associated with the presence of temporarily located construction 95

98 workers will be drawn. This preliminary conclusion is based on the limited potential for recreation to be taken by construction workers around the reservoirs and flooded gravel pits that make up the SPA. Disturbance Operation 1.11 The extent of any disturbance during operations due to aircraft movement has been investigated during the winter of 2016/17 and further surveys are currently ongoing (i.e. winter of 2017/18). The surveys in 2016/17 were carried out across 12 waterbodies regularly over-flown by aircraft, using a general method developed by Natural England and reported by FCPR The number of disturbance events recorded in the 2016/17 surveys that were caused by aircraft movement was low. Of 3,386 aircraft over-flights recorded in the winter of 2016/17, only 27 over-flights (0.8%) resulted in disturbance of water birds and 25 out of 27 disturbance events (93%) did not involve either gadwall or shoveler. As would be expected from general theory, the disturbance events tended to be associated with atypical aircraft movements. Birds roosting, loafing or feeding under well used flight paths show little or no reaction to aircraft, suggesting strongly that they are habituated The two year survey programme has focused on recording disturbance events and, while it is not complete, the interim results strongly suggest that a conclusion of no adverse effects on integrity of the SWLW SPA due to disturbance by aircraft overflight will in due course be reached. Operational Management Bird Strike 1.14 It is considered likely that any potential for additional wildlife management measures around Queen Mother Reservoir to adversely affect the integrity of the designated features of the SWLW SPA will in due course be discounted within the project level HRA for Heathrow expansion for two reasons The first reason is that the third runway will be at a similar distance from Queen Mother Reservoir as the existing southern runway is to Wraysbury Reservoir (where no bird scaring or control occurs). The second reason is the very low numbers of gadwall and shoveler that use Queen Mother Reservoir. Surveys have been carried out across the Queen Mother Reservoir in the winter of 2016/17 (over 14 survey visits) and these have recorded a peak of 3 and mean 50 FCPR (2014) Ditchford Gravel Pits West: Upper Nene Valley Gravel Pits SPA Designated-Species Disturbance Report. Report by FPCR Environment and Design Ltd for Bovis Homes Ltd. 96

99 of 0.21 gadwall present, with the corresponding figures for shoveler being 1 and At these levels, it can be concluded that the potential to adversely affect the SPA population by use of bird scaring techniques on the Queen Mother Reservoir is minimal, and unlikely to adversely affect the integrity of the SPA. Effects of Direct and Indirect Habitat Loss and Fragmentation on Habitats and Functionally Linked Habitats 1.17 The potential for the direct loss of habitat from within the SWLW SPA or functionally linked habitats in the surrounding area is not discounted at this stage by the rhra but it does acknowledge that avoidance and mitigation measures are likely to be available should any habitat losses take place It can be confirmed that direct loss of habitat within the SPA will not occur as a result of Heathrow expansion because all potential options (including changes in the road network) are being designed to avoid designated areas The extent and degree of any effects on functionally linked habitat is dependent on the final design, but we concur with the rhra for the revised draft NPS that mitigation measures can be delivered to ensure no adverse effect on the integrity of the SWLW SPA. Air Quality Effects (Road Traffic) 1.20 Heathrow has committed to no more Heathrow related traffic on the roads than today ( Heathrow Taking Britain Further ). Added to the transport mode share figures that Heathrow will need to achieve (as required by paragraph 3.50 of the revised draft NPS), this suggests that detailed analysis of air quality information, in the context of road traffic related to Heathrow expansion, is likely to result in a conclusion of no adverse effect on integrity of any European sites being drawn Alternatively, if identified as necessary within the project-level air quality appropriate assessment, there are a range of additional mitigation measures from simple solutions that can be considered, such as controlling the routeing of construction traffic, through to measures required to alter passenger behaviour to achieve the air quality and mode share requirements within the revised draft NPS (as described in Heathrow Taking Britain Further ) Although further air quality and traffic modelling are required to provide a definitive conclusion, current knowledge suggests that no adverse effects on the 97

100 integrity on any European sites due to changes in air quality will be drawn within the project level HRA. Effects of Changes to Water Quality and Quantity 1.23 While the rhra notes that changes to water quality and quantity which may affect functionally linked habitats of the SWLW SPA cannot be discounted at this stage, due to the need to alter the routes of a number of rivers due to the position of a third runway at Heathrow, we can confirm that the aim of the design of the future water environment (currently ongoing) is to ensure that the flow rates, water quantity and water quality downstream of the development are maintained at current levels (or improved with regard to water quality if possible) This core principle is a fundamental element of our masterplanning, scheme design and optioneering process and should ensure no adverse effect on the integrity of the SWLW SPA would arise as a result of the effects of changes to water quality or water quantity. 98

101 Appendix 3 Updated Economic Analysis by Frontier Economics: Competition & Change 2017 (December 2017) 99

102 COMPETITION & CHOICE 2017 A report prepared for Heathrow December 2017

103 Frontier Economics Ltd is a member of the Frontier Economics network, which consists of two separate companies based in Europe (Frontier Economics Ltd, with offices in Brussels, Cologne, Dublin, London & Madrid) and Australia (Frontier Economics Pty Ltd, with offices in Melbourne & Sydney). Both companies are independently owned, and legal commitments entered into by one company do not impose any obligations on the other company in the network. All views expressed in this document are the views of Frontier Economics Ltd.

104 Competition & Choice 2017 CONTENTS Executive Summary 4 1 Introduction 7 2 Observations on the DfT s updated analysis Updated forecasts DfT s Appraisal Measures: Which ones are most relevant? Does the DFT approach understate the benefits of expanding Heathrow? Extrapolated results 18 3 Impact of Expansion on Ticket Prices Economic theory of capacity constraints Capacity constraints and their effect in London Descriptive analysis of ticket fares Benefits of an expanded Heathrow Benefits of an expanded Gatwick Comparing Heathrow and Gatwick Expansion 32 4 Connectivity and catalytic benefits Connectivity analysis Catalytic impact 46 5 Conclusion 52 Annex A Congestion Premium Analysis...53 Annex B Catalytic Impacts...68 frontier economics

105 Competition & Choice 2017 EXECUTIVE SUMMARY Objective The Department for Transport has recently released updated forecasts for UK aviation 1 along with the accompanying update to the Department s cost and benefit appraisal of the various runway options considered by the Airport s Commission 2. These new forecasts have been produced in response to the fact that the growth in air transport demand in the UK has, in the last few years, far outstripped the projections in the DfT s previous forecast (which was a key input into the AC s decision-making). The most visible consequence of this surge in aviation demand is that Gatwick Airport is now much closer to operating at its maximum capacity than was assumed in the forecasts used by the AC. It has been suggested, not least by Gatwick Airport, that this change in the demand landscape means that the choice between Gatwick and Heathrow as the site of the next new London runway should be revisited as superficially many revised economic measures appear to show a convergence between the results for Heathrow and Gatwick, compared to the AC s results, and in certain cases, the results for Gatwick may appear to be larger than for Heathrow. Nevertheless, both the DfT and the Government have been clear that nothing in these new reports has altered the previous conclusion for supporting a NW runway at Heathrow. Frontier agrees with this conclusion. While the deluge of information and plethora of different metrics may serve to muddy the water to some extent, higher demand in the present than was previously expected makes the case for airport expansion more urgent but does nothing to alter the relative ranking of the alternative schemes. The purpose of this report is to consider three main areas: Observations on the DfT s updated forecasts and economic appraisal; An estimate of the congestion premium at Heathrow, that is the extent to which fares are elevated at Heathrow as a direct result of existing capacity constraints; and A comparative estimate of the connectivity and catalytic (trade and FDI) benefits of expanding Heathrow and Gatwick. Our results draw on underlying economic theory and our conclusions are supported by a significant body of empirical analysis. DfT s revised forecasts and economic appraisal DfT s new forecasts for air travel from the UK reflect the increase in travel over the last few years which was not captured in its previous forecast frontier economics 4

106 Competition & Choice 2017 We have reviewed this evidence and conclude that the new forecast provides no reason to change the relative ranking of Heathrow and Gatwick as the best location to provide additional hub airport capacity. In particular we note that: While the DfT s short run forecasts are higher than previously, they broadly converge to the same trend over the long run. The fact that Gatwick is fuller than previously expected may make the case for a new Gatwick runway stronger in absolute terms, but this does not mean the relative case is better vs Heathrow, because the case for a new runway at Heathrow is also stronger. Heathrow cannot be fuller today, because it is already at 100% capacity, but the unexpected surge in demand means that there is even more loss occurring at Heathrow today as a result of congestion, resulting in higher fares. This is confirmed by the analysis of the congestion premium in this report. Taking these points into account there is no reason to think the ranking of the two options would change in any way. We also note that while the gap between some of the economic appraisal estimates for Gatwick and Heathrow appears to have narrowed, this effect is largely explained by the way in which benefits in the distant future have been extrapolated. There is some doubt over these figures, which do not show a slow-down in the cumulative growth of benefits at Gatwick in the 2 runway case after it becomes constrained again in Impact of airport expansion on ticket prices We have analysed how ticket prices are affected by capacity expansion at both Heathrow and Gatwick and have undertaken detailed econometric analysis to estimate the cost of the congestion premium today. We conclude that expanding Heathrow Airport provides significantly greater benefits to passengers than expanding Gatwick Airport. In particular, we demonstrate that: Expanding either airport is likely to have an impact on ticket prices at both airports in the long term. Overall, however, the reduction in ticket prices caused by expansion of Heathrow Airport is significantly larger than the impact on ticket prices of Gatwick expansion. This is because excess demand at Heathrow Airport is substantially higher than at Gatwick Airport and Heathrow is unique compared to other London airports because it is a hub offering a substantial long haul network. The reduction in ticket prices from expansion at Heathrow is substantially larger compared to Gatwick. If Heathrow were expanded today, ticket fares would decrease by 23% relative to other London airports as a result of removing the capacity constraint. On a return flight basis, this means that over the course of 2016, the congestion premium cost passengers at Heathrow roughly 2 billion. 3 By 2030, this would result in a reduction in one-way ticket prices of 64 and 247 for short and long haul flights respectively compared to a reduction in 3 We assume that the congestion premium on inbound flights is equal to the premium on outbound flights. We apply the short haul premium of 28 to short haul flights and the mid-point of the long haul premium of 99 to long haul flights over short and long haul passengers respectively. frontier economics 5

107 Competition & Choice 2017 ticket prices as a result of Gatwick Airport expansion of 24 and 83 for short and long haul flights respectively. Therefore, we conclude that expanding Heathrow provides a much greater reduction in ticket prices for passengers than expanding Gatwick. Impact of airport expansion on connectivity and GDP We have also modelled the likely impact that airport expansion would have on air connectivity by considering the impact of additional capacity on the ability to offer new direct connections from each airport. We have also quantified the catalytic impact in terms of trade and FDI of each option. The increase in connectivity is much larger for expanding Heathrow compared to Gatwick. Expanding Heathrow Airport would provide over 40 new long haul connections for London. This contrasts with only 2 new long haul connections for London from expanding Gatwick Airport. Our analysis therefore demonstrates that passengers choice of connections is increased by a much greater extent as a result of expanding Heathrow when compared to expanding Gatwick. Finally, in terms of the catalytic impact provided by a new runway, the estimate for Heathrow is more than two times that for Gatwick, at 102 to 113 billion for Heathrow (depending on the speed at which the extra capacity is phased into operation) while only 41 billion for Gatwick. Conclusion Our assessment shows that Heathrow Airport expansion provides considerably higher benefits to passengers than expanding Gatwick Airport and that the differential between Heathrow and Gatwick is therefore substantially greater than implied in the DfT s figures. Not only is the reduction in ticket prices from expansion at Heathrow larger than compared to Gatwick, but an expanded Heathrow will provide greater connectivity and economic benefits. Our overall conclusions apply under all likely future market developments. Expanding Heathrow Airport would lead to substantially greater reductions in ticket prices and greater connectivity. frontier economics 6

108 Runway utilisation Competition & Choice INTRODUCTION In September 2012, the UK Government set up the Airports Commission (AC) to evaluate different options to deliver additional airport capacity in the South East of England. In July 2015, after nearly three years of analysis, the AC unanimously recommended that the best option for expansion was to add a third runway at Heathrow, in preference to a second runway at Gatwick In October 2016, the Government acted upon the AC s recommendation and announced that it supported a third runway at Heathrow. In February 2017, it published its draft Airports National Policy Statement (NPS), setting out the specific requirements that Heathrow would need to meet to gain planning permission for the third runway. A revised version of the draft NPS is currently open to public consultation, closing in December Since the AC report, the demand for air travel has grown significantly. As a consequence, while Heathrow has been acting at its effective maximum capacity in terms of runway utilisation since the middle of the last decade, Gatwick too is now approaching maximum capacity. Figure 1 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Heathrow and Gatwick are both constrained LHR LGW Source: Frontier analysis based on schedules data from OAG Analyser and capacity data from the DfT: UK Aviation forecasts (2017) This report updates analysis previously prepared for Heathrow by Frontier and submitted to the AC in It was commissioned by Heathrow Airport to provide support as it responds to the consultation on the draft NPS. Our analysis covers three main areas: Observations on the DfT s updated forecasts and economic appraisal; frontier economics 7

109 Competition & Choice 2017 An estimate of the congestion premium at Heathrow, that is the extent to which fares are elevated at Heathrow as a direct result of existing capacity constraints; and A comparative estimate of the connectivity and catalytic (trade and FDI) benefits of expanding Heathrow and Gatwick. The structure of this report is as follows: In Section 2 we set out our observations on the DfT s recent forecasts and economic modelling. In Section 3 we summarise the results of our econometric analysis to estimate the size of the congestion premium at Heathrow based on 2016 data. In Section 4 we summarise the results of our network modelling. This is to compare and contrast how expansions at Heathrow and Gatwick could be expected to improve connectivity to long haul markets. We also estimate the catalytic impact of both expansion options. In Section 5 we provide our overall conclusions. We also provide further technical details underlying the econometrics analysis and catalytic impact analysis in separate annexes to this report. frontier economics 8

110 Competition & Choice OBSERVATIONS ON THE DFT S UPDATED ANALYSIS 2.1 Updated forecasts The trigger for Frontier to update its previous analysis has been the recent publication by the Department for Transport s forecasts for UK aviation 4, and the accompanying update to the Department s cost and benefit appraisal of the various runway options considered by the Airport s Commission 5. These new forecasts have been produced in response to the fact that the growth in air transport demand in the UK has, in the last few years, far outstripped the projections in the DfT s previous forecast (which was a key input into the AC s decision-making). While the demand for air travel has historically developed in a fairly predictable and stable relationship to the growth in GDP, the last ten years, which encompass the financial crisis of 2008, have been particularly difficult to forecast. Turbulence in financial markets and the consequential economic downturn resulted in a significant fall in air travel. But from 2010 demand started to pick up again, powered both by general economic recovery and falling oil prices. This recovery, which is not just a UK phenomenon, has been faster than expected or would have been predicted on the basis of the relatively sluggish economic growth that Europe has experienced for the last few years. Figure 2 Historic UK passenger demand Source: DfT, UK Aviation Forecasts, October 2017, Figure 2.2 The most visible consequence of this surge in aviation demand is that Gatwick Airport is now much closer to operating at its maximum capacity than was assumed frontier economics 9

111 Competition & Choice 2017 in the forecasts used by the AC. From 2011 to the number of passengers served by Gatwick has increased from c.34m p.a. to c. 43m p.a.. By apparent contrast, passenger traffic at Heathrow has not grown by as much (from 69m p.a. to 76m p.a. over the same period). However, this more limited growth must obviously be viewed in the context of the fact that well before even 2011 Heathrow was already effectively operating at its annual maximum for ATMs of around 480,000p.a.. Hence expansion at Heathrow has only been achieved by changes in the fleet mix of airlines operating there and the progressive displacement of short haul with long haul routes, operated by larger aircraft. It has been suggested, not least by Gatwick Airport, that this change in the demand landscape means that the choice between Gatwick and Heathrow as the site of the new London runway should be revisited. Superficially this argument might seem to be supported by the fact that in the DfT s updated economic appraisal some of the many revised economic measures presented appear to show a convergence between the results for Heathrow and Gatwick, compared to the AC s results, and in certain cases, the results for Gatwick may appear to be larger than for Heathrow. Nevertheless it is important to stress that both DfT and the Government have been clear that nothing in these new reports has altered the previous conclusion: the NW runway at Heathrow, unanimously supported by the AC in 2015, remains the Government s choice. Frontier agrees with this conclusion. While the deluge of information and plethora of different metrics may serve to muddy the water to some extent, higher demand in the present than was previously expected simply makes the general case for airport expansion more urgent, while doing nothing to alter the relative ranking of the alternative schemes Short run vs long run effects Forecasting, especially over the 60 year time horizon required by the UK government s official appraisal methodology 6, is far from a precise science. In fact, it is not so much a process of predicting the future as one of articulating the potential future consequences for demand on the basis of different assumptions: for instance whether historic long run relationships between GDP, oil price and aviation demand are maintained, or perhaps are altered due to new factors such as telecommunications substituting for business travel or saturation in the growth of available leisure time. With this in mind, it should first be noted that DfT s new forecasts do not, broadly, suggest a change in the long run growth in aviation demand compared to its previous estimates. Indeed, as illustrated by Figure 3, below, DfT s long run forecast is not materially different to those used by the AC, notwithstanding demand being higher in the immediate future. 6 Airports Commission: Appraisal Framework frontier economics 10

112 Competition & Choice 2017 Figure 3 Terminal passengers at UK airports, demand range comparison (mppa) Source: DfT, Updated Appraisal Report - Airport Capacity in the South East, October 2017, Figure 2.2 Figure 3 not only shows the extent to which demand has outstripped the previous projection in the last few years but also that DfT s new projections do not suggest a different long run path for demand. In this context, the recent surge comes to look more like a correction to previous trends. From 2030 it is anticipated that demand will be broadly in line with previous expectations. What this tells us is that despite the current higher demand figures, there is really no significant new information here to change our view of the long run future. Given that runway capacity is a long run decision, it follows therefore that the new forecast supports, rather than challenges, the AC s recommendation Is the case for Gatwick now stronger? Clearly, the fact that passenger demand at Gatwick is significantly higher than previously anticipated strengthens Gatwick s claim that it needs a new runway sooner rather than later, all other things being equal. But it does not follow from this that the relative ranking of Heathrow and Gatwick need change. The fact that Gatwick is much closer to maximum capacity today than was previously anticipated is the visible consequence of the surge in aviation demand. It is clear that if demand continues on this trajectory then congestion costs will start to bite at Gatwick sooner than anticipated; this is the core of the argument for expanding Gatwick. But as we have already discussed, it is not possible to observe an equivalent demand effect at Heathrow, because in terms of utilisation Heathrow is already effectively full, and has been since roughly 2005/06, as illustrated by Figure 1, above. frontier economics 11

113 Competition & Choice 2017 The difficulty this creates, however, is that the cost that congestion at Heathrow is imposing on passengers and on the UK is not directly observable. This cost relates to the difference between the unconstrained demand to fly through Heathrow and the level that can be served in practice. This cost was already present when the AC made its original decision. On the assumption that the underlying demand to fly through an unconstrained Heathrow has similarly grown much faster than anticipated, the cost of this constraint will also have grown and so too the benefits of expansion. Viewed in this light, the convergence in passenger numbers between Gatwick and Heathrow is a misleading guide to the relative benefit of expanding one airport or the other. It is true that the congestion costs of failing to expand Gatwick are now greater than previously thought. But Heathrow is also much more constrained (relative to underlying unconstrained demand) than expected, so the congestion costs of failing to expand Heathrow are also now greater. On the face of it there is no reason to consider that one effect is larger than the other, hence again there is no reason to think that the relative ranking of the two choices may have changed. However, while we acknowledge the thoroughness and detail of the DfT s forecasting framework, Frontier does take issue with one aspect of this framework which we believe leads the DfT to understate the costs of congestion at Heathrow, and so overstate both long run demand at Gatwick and the benefits of expanding capacity there. We return to this point in section DfT s Appraisal Measures: Which ones are most relevant? As already noted, one of the drawbacks of both the DfT s appraisal methodology and the AC s approach is the proliferation of different benefit and welfare measures, which seem in some circumstances to produce contradictory conclusions. Some time has passed since the AC s decision so it is probably worth reiterating that while the AC performed a traditional cost benefit analysis (CBA) on the various options, this was not the result on which it placed most weight in making its decision in favour of Heathrow. Figure 4 below summarizes the four key measures used to compare the various schemes, starting with net present value, which is the most comprehensive measure, most often cited as the result of public Cost Benefit Analysis (CBA). frontier economics 12

114 Competition & Choice 2017 Figure 4 Appraisal method Net present value Net social benefit Alternative appraisal methods in DfT report Total benefits to passengers and the wider economy Passenger benefits Description This is the discounted value of all private, public and social costs and benefits over the first 60 years of the project. Included are the direct costs and benefits to passengers and airlines, the private cost of airport construction, impacts on government revenues and environmental disbenefits. As net present value but excluding the costs of scheme construction and surface access. As net social benefits but excluding environmental disbenefits (air pollution and noise) and losses to airlines because of reductions in fares. The value to passengers of greater airport capacity. As above but excluding government revenues and wider economic impacts. The AC highlighted that the appraisal process it was undertaking differs from a traditional public CBA, as presented in the official government appraisal guide, WebTAG. The WebTAG approach is designed to appraise publicly funded projects, and is not equipped to assess projects such as these runway developments which are largely privately funded. As a result of this issue, the AC was clear in focussing its primary attention on the net social benefits created by the alternative options, rather than the full cost benefit results. In some ways this was an unusual step in the appraisal of transport projects, but the Commission has been very clear that it is justified in this case. The overall scale of net social benefits delivered by each scheme is most relevant to the consideration of whether a National Policy Statement or Hybrid Bill should be passed through parliament, given that a large proportion of the cost will be funded privately rather than by the public purse. Because the schemes are assumed to be predominantly privately funded, benefits to international-to-international transfer passengers are included, as they would contribute to the costs of the scheme as well as supporting the delivery of a dense route network for UK travellers. In addition, a calculation including scheme costs has been carried out to provide a net present value, given the scope for some or all of these costs to displace expenditure elsewhere in the economy. This contrasts with publicly-funded projects for which a benefit-cost ratio is more relevant to allow government to prioritise public expenditure based on the comparative value for money of different projects. In this instance, however, even those elements which might be more likely to be publicly funded, in part or in whole, such as surface access interventions, would need frontier economics 13

115 Competition & Choice 2017 to be judged on the basis of a broader benefit-cost ratio calculation which incorporates broader benefits to non airport users. 7 The Commission s logic for its recommendation is clear. CBA is relevant to the assessment, in that schemes that fail to generate a positive NPV in a CBA should be treated with great caution, regardless of whether they are publicly or privately funded. A negative NPV would imply that the UK overall was worse off with the scheme than without. But that is not the case here. Both schemes generate a positive NPV. Therefore both Heathrow and Gatwick developments are shown to be independently worthwhile. However, because the overwhelming majority of both schemes would be privately funded, choosing between the two alternatives on the basis of CBA is not relevant because CBA is a method for prioritising the spending of fixed sums of public money. In this case there is the choice of one private investment or the other, primarily because the Government has already stipulated that only one runway should proceed. Given that constraint, the AC s argument was that the runway that delivers the greatest net social benefit should be the one that is preferred. And that option was found to be Heathrow by a substantial margin. In the DfT s previous analysis 8, based on the AC s central Appraisal of Need scenario, the DfT found that the net social benefits from expansion at Gatwick were in the range 10.1bn to 11.4bn, compared to 18.6bn to 20.4bn for the NW runway at Heathrow. The revised forecasts produce similar results, with the relativities of the benefits roughly unchanged, which is consistent with the intuitive arguments made previously that the new demand forecasts should not be expected to alter the relativity of the two options significantly. In the revised appraisal the net social benefits of both schemes are slightly lower: 8.1bn to 9.3bn for Gatwick and 16.2bn to 17.5bn for the NW runway at Heathrow. 2.3 Does the DFT approach understate the benefits of expanding Heathrow? While we are broadly supportive of the DfT s analysis, we nevertheless have identified a number of areas where we believe the analysis tends to understate the relative benefit of expanding Heathrow vs expanding Gatwick. This was true in the AC analysis. We believe these distortions may actually be even greater in the current appraisal, notwithstanding the fact that the results stills strongly support the choice of Heathrow. The first two of these issues we will elaborate on at greater length in the remainder of this report. The third point is a relatively small methodological puzzle we have not been able to resolve with DfT, which places a question mark over the overall appraisal figure for Gatwick. 7 Airport Commission, 2015, Final report, p Further Review and Sensitivities Report (FRSR), October 2016 frontier economics 14

116 Competition & Choice Connectivity and catalytic economic benefits The AC s analysis and the DfT s updated appraisal both include estimates of the wider, macro-economic benefits associated with the improvement in UK connectivity. These benefits include, among other things, the impact on trade, investment and tourism and knock-on long term impacts on productivity and GDP. Taken over the standard 60 year appraisal time frame, these benefits are estimated to be very substantial. In the case of the AC s analysis, the estimate for Heathrow expansion in the Assessment of Need scenario was a boost to GDP of up to 147bn as opposed to 73bn for the Gatwick second runway. DfT s updated analysis does not present a GDP impact, but it does present a range of estimates for the impact of connectivity on trade (Heathrow 8.8bn bn, Gatwick 10.9bn- 59.5bn 9 ). In both cases the estimates are roughly 30% higher than the figures derived by DfT in its previous FRSR report. The relativity of the benefits estimated for the Heathrow and Gatwick options remains largely unchanged. These estimates are given for information and do not form part of the overall estimates of net benefits that the DfT presents. However, the estimates add important additional evidence that the wider benefit of Heathrow expansion significantly outstrips that of Gatwick, over and above the headline Net Social Benefit figures. Apart for the uncertainty in quantifying these effects, DfT also justifies excluding these estimates from the overall assessment on the grounds that there is potential for double counting. We agree there are grounds for being somewhat cautious about the use of these figures. Unlike the core WebTAG approach there is no single approved methodology for assessing wider catalytic benefits of connectivity, which means the potential estimates may be subject to greater uncertainty than the conventional cost benefit figures. We are less convinced that double counting justifies focussing solely on CBA measures. First, we note that the trade figures estimated by DfT are simply flows of exports and imports which cannot be added to the Net Social Benefits, because these flows are not a measure of change in either income or welfare. On the other hand, it is possible to consider adding the income or GDP effects of greater trade to Net Social Benefits, subject to certain caveats. It is generally accepted that trade in general is economically beneficial, but trade itself, made up of imports and exports, has an ambiguous static impact on national income. So long as the UK runs a persistent trade deficit in goods it is possible that the static impact of more trade on GDP is in fact negative. However, the reason why imports benefit the economy as well as exports is down to its contribution to greater efficiency, the ability to source higher quality inputs not available domestically, or the role of distributed supply chains which may permit some 9 Updated Appraisal Report - Airport Capacity in the South East, Table 5.2 frontier economics 15

117 Competition & Choice 2017 production steps to be performed more cheaply offshore before part finished products are imported for further processing. Trade regardless of its direction thus has the potential to raise national income via the route of improving overall productivity. This is a medium-to long term process, the benefit of which ripples through the economy and does not accrue directly. By definition, a CBA is a micro-economic measure and has difficulties in taking into account macroeconomic and long run general dynamic effects, whereas these are key features in an analysis of the long run catalytic effects of connectivity. Because there are aspects of the project that are captured by the CBA and not by catalytic analysis, and the other way around, it is reasonable to consider both types of assessments as complementary and relevant for projects with significant macroeconomic impacts. For instance, CBA typically assumes full employment, whereas in the productivity analysis additional jobs in the long run can be attributed a value. Historically CBA has been the most common tool in policy analysis and transport appraisals 10. However, macroeconomic modelling is also sometimes used, either on its own or as a complementary analysis, to a CBA. For instance, Governments and institutions such as the World Bank, OECD, WTO and IMF use CGE models in the policy development process, and HMRC models the UK tax system using a CGE model. 11 In investment projects, CGE models are used quite extensively, especially in Australia. An assessment based on both a CBA and a macro model has been used for major investments such as the Second Sydney Airport (Joint Study, 2012) and major road and rail links in Melbourne (e.g. Allen et al, 1995; Meyrick and Associates, 2008, High Speed Train). 12 In transport appraisals, it is most common for CBA alone to be conducted; however, in the US studies typically also report GDP per dollar and jobs per dollar metrics. In addition, the US considers a range of impacts beyond commuting, including measures that extend well beyond a CBA and are based on regional or local macroeconomic models. 13 We note also that a further reason rationale for considering these macro-economic effects to be double counted is that they overlap with wider economic benefits, such as those of agglomeration, which, although small, were included in the DfT s FRSR analysis. However, in the present case this argument is weakened because DfT has now chosen to exclude agglomeration from its wider economic benefits (because of the difficulty in measuring negative effects of congestion). In Section 4, we present our own revised estimates of the additional connectivity and its GDP impact, as would be supported by the NW Runway at Heathrow, taking 10 Peter Mackie and Tom Worsley, 2013, International Comparisons of Transport Appraisal Practice, University of Leeds, April 2013, Available: 11 HMRC, 2013, CGE model documentation, Available: _new.pdf 12 Peter Forsyth, 2014, Infrastructure and the Investment Evaluation Issue, Submission to the Productivity Commission, Inquiry into Public Infrastructure, Department of Economics, Monash University, March Peter Mackie and Tom Worsley, 2013, International Comparisons of Transport Appraisal Practice, University of Leeds, April 2013, Available: frontier economics 16

118 Competition & Choice 2017 into account DfT s new demand forecast. These figures are contrasted with an estimate of the equivalent effects of the proposed Gatwick expansion. In its appraisal framework, the AC included benefits to international-to-international transfer passengers. We agree with this approach. As set out in more detail in Section 4, transfer passengers provide considerable connectivity benefits to the UK. This is because they increase total demand and therefore the overall business case for individual routes. Or in other words, without transfer passengers (which made up 36% of total demand at Heathrow in 2016), airlines may decide to reduce their flight frequency or potentially even stop operating the route altogether if total demand were to slip below the airline s minimum level of commercial viability. Clearly reduced frequencies and lost routes would be detrimental to O/D passengers. And secondly, transfer passengers will contribute to the overall cost of expansion Congestion premium The appraisal estimates produced by DfT include passenger benefits from expansion that reflect, largely, the avoidance of increased ticket fares resulting from congestion at the London airports. While we agree with the approach in principle, we believe that the DfT s results are subject to a methodological issue that significantly understates the benefit of Heathrow expansion to passengers and hence distorts the relative impact of the two main expansion options. The DfT s approach understates the congestion premium at Heathrow today and in the future. This is due to the way the DfT s airport choice model, NAPAM, is designed. This model requires, by assumption, that no airport is congested in the base year. This is because NAPAM s parameters are calibrated so that in the base year realised (met) demand is, by definition, less than technical capacity. This implies that NAPAM treats all airports as uncongested in the base year. As a consequence, passenger choices between Heathrow and other airports are modelled as their preferred choices, whereas in reality, Heathrow has been operating at capacity for many years and so choices in the base year already represent a response to existing constraints. As a result, this approach significantly understates the current congestion premium at Heathrow, and, by extension, the premium in future years. Put differently, existing shadow costs are mistakenly represented by the unconstrained demand estimation as a lower preference for flying from Heathrow than is in fact the case. As a consequence this process also distorts the modelling of how demand would respond to new capacity in the future, to the detriment of Heathrow, by understating the pent-up demand to use Heathrow, were the capacity available. DfT s projection of future airport choice introduces a shadow cost for future years which is calibrated to choke off demand for a given airport to its technical capacity. This is by definition zero in the base year, regardless of how much traffic is actually already being diverted or choked off as a result of existing excess demand. As the unconstrained demand forecast rises in the future, these shadow costs ramp up. The alleviation of these shadow costs by expansion is the major passenger benefit identified in DfT s modelling. But by treating the starting point as zero for both frontier economics 17

119 Competition & Choice 2017 Heathrow and Gatwick the results are significantly skewed against Heathrow which clearly already operates under conditions of excess demand. This problem was present in the forecast used by the AC, but has simply been exacerbated in the new forecast, because Gatwick is now so near to capacity. As a result, the DfT s projections suggest that the passenger benefits from expanding Heathrow are now very slightly smaller than those of expanding Gatwick. Given evidence of the current congestion premium at Heathrow, this clearly cannot be the case. In a previous report 14, we presented results of an extensive econometric analysis that demonstrated a significant congestion premium already existing at Heathrow in In this report we repeat and extend that analysis for 2016 and confirm the result that Heathrow passengers are paying an increasing premium due to congestion, while there is no robust evidence of a similar effect at Gatwick. Distributional impacts While the congestion premium at Heathrow may be under-stated, it could be argued that this has a limited effect on the overall appraisal, because most of this premium is interpreted as a transfer between passengers and airline shareholders, which can be viewed as neutral in CBA terms. In our view there is a case for not treating these transfers as neutral and focussing more on passenger benefits. While a strict application of microeconomics would suggest that the overall welfare impact should disregard any transfers, from a macroeconomic point of view it is clear that the impact is not the same. For example, the impact on the economy is not the same when considering a lower dividend for an airline s shareholders compared to a reduction in fares that is spread across passengers using Heathrow. In addition, recognising the greater importance of consumer compared to producer surplus is a common procedure for most UK regulatory bodies as they generally have statutory duties towards consumers. In the case of aviation, the UK CAA has the duty to further the reasonable interests of airport users. As a result, the benefits of economic regulation include the overall welfare improvement but also the transfer from producer surplus to consumer surplus. Overall, we therefore believe that there is a case for focusing more on the passenger benefits of expansion, which combined with a more accurate assessment of the congestion premium, clearly indicates the benefits of expanding Heathrow to be far in excess of those from expanding Gatwick. We detail our estimates of the congestion premium in Section Extrapolated results In some of the measures presented by DfT, Gatwick appears to generate greater overall benefits over the full 60 year appraisal period. We note that this has not changed the Government s clear conclusion to back the NW runway at Heathrow. 14 Frontier Economics, 2013, Competition and choice, Available frontier economics 18

120 Competition & Choice 2017 In reviewing these results it is clear that the driver of these apparently contradictory results lies in the way future benefits have been extrapolated. For instance, Figure 4.1 of the appraisal shows that cumulative passenger benefits of the Gatwick expansion overtake those of the Heathrow NW runway in c However, it should be noted that DfT s demand forecasts only run to The period from 2050 top 2085 is not covered by the modelling, and so is subject to extrapolation. Unfortunately DfT s report contains very little detail; as to how this extrapolation has been carried out. But examining these findings, as illustrated by DfT s figure 4.1, it is not clear how it is possible for the passenger benefits of Gatwick expansion to accelerate the way they appear to into the future at a faster rate than Heathrow. Up to 2050 the faster growth of benefits at Gatwick is understandable: Even with a third runway, Heathrow is expected to be full again around So after that date and before Gatwick becomes congested the faster growth at Gatwick would be expected to accrue more benefits at the margin, albeit starting from a lower base. However, under DfT s assumptions, a 2 runway Gatwick would be full from Therefore, from 2050 onwards, it is not clear how Gatwick could be expected to catch up and overtake Heathrow at such a rate if both airports are assumed to be constrained. The growth in benefits during the Extrapolated Period clearly drives the overall result that Gatwick eventually overtakes Heathrow. However, there is no discussion in the DfT s analysis on how these extrapolated growth rates have been derived. The growth rate appears to be c. 4.3% per annum for Gatwick and 3.4% per annum for Heathrow. It is not clear why this should be the case. And clearly, over such a long appraisal period, even small differences in growth rates become compounded and can lead to diverging results. We understand from DfT that the primary cause of the differential growth rate is that the Gatwick option provides fractionally more capacity in the long run than the Heathrow option. However, on consideration we find it hard to reconcile this with the figures in DfT s demand forecast. Table 34 of the DfT s latest forecast 15 does show total London passengers in 2050 higher in the Gatwick expansion scenario, but only fractionally (249m vs. 248m), while nationally total passengers are lower (432m vs 435m). It is hard to reconcile this with a projection that shows benefits from Gatwick growing at almost 1% p.a. faster for the following 35 years. Furthermore, as we attempt to demonstrate below, our view is that DfT mis-states the difference in the level of passenger benefits generated by the two runway options by failing to take in to account the congestion premium currently existing at Heathrow. Add this in to the mix and the long run projection of benefits growing much faster at Gatwick seems quite unlikely. Given these discrepancies, we consider it unwise to place significant weight on benefits occurring in the distant future that may be the artefact of extrapolation assumptions. In conclusion we think the DfT have been wise therefore to stress the importance of the earlier benefits generated by Heathrow expansion. 15 UK Aviation forecasts, Oct. 2017, p. 104 frontier economics 19

121 Competition & Choice IMPACT OF EXPANSION ON TICKET PRICES This section assesses the benefits to passengers from airport expansion in terms of the likely impact that expansion would have in reducing ticket prices. We first explain the theory of why the capacity constraints may result in increased ticket prices and how this relates to the London airports. We next present and compare the empirical evidence on the cost of the capacity constraint at Heathrow and Gatwick in 2016 and Economic theory of capacity constraints To understand the effects of capacity constraints on ticket fares, it is useful to think of price setting in terms of supply and demand. In a perfectly competitive, unconstrained situation, ticket fares would be set by the intersection of supply and demand. However, when demand for flying from an airport exceeds the airport s capacity, the competitive ticket price is not possible because the demand exceeds supply. As a result, market prices rise to choke-off demand. This scenario is illustrated in Figure 5 below. The vertical blue line indicates the number of passengers the constrained airport can accommodate (Q1 in the figure). The red lines provide the demand function, which is downwards sloping as more people want to fly at lower prices. Over time the demand function shifts outward as income increases and more people want to fly. When the demand curve shifts, more people (Q2 in the figure) want to fly to and at the existing price (P1). As capacity is fixed, the number of passengers cannot increase so the price rises to ensure that demand equals capacity (P1 to P2). Figure 5 Excess demand leads to increased prices Based on the economic theory, we can identify the following relationship between excess demand (Q2-Q1) and the cost of the constraint (P2-P1): greater excess demand before the expansion leads to a higher cost of the constraint; and higher than average fares and a lower price elasticity lead to a higher cost of the constraint as the price needs to rise by more to reduce excess demand. When a capacity constraint at an airport is removed, the benefit to passengers is equal to the cost of the constraint. Figure 6 shows the same situation as in Figure frontier economics 20

122 Competition & Choice but with an increase in capacity. Increased capacity (such as from a new runway) shifts the supply curve outward as a greater number of passengers can now be accommodated (Q3). At the new capacity level, there is no excess demand so the price falls to P3. The difference between P2 and P3 represents the benefit to passengers as on average they now pay lower ticket prices. Figure 6 Removing capacity constraints benefits passengers Given that we expect expanding capacity would lead to lower ticket prices, it is important to clarify the mechanism that leads to the reduction in ticket prices by considering both airport and airline pricing. For regulated airports (such as Heathrow and Gatwick), the airports cannot adjust their pricing to ensure that demand equals supply in the constrained case. As a regulated airport does not capture any of the scarcity rents that result from a capacity constraint, competition in the airline market plays an important role in adjusting prices so that demand equals supply. At an unconstrained airport, the conditions of entry and exit can ensure that ticket prices remain at the fully competitive level. However, with restricted access, this process cannot function. Free entry cannot occur if slots are not available, and the restricted capacity leads to rising ticket prices so as to match passenger numbers to the seats available. The extent of the increase will depend on the magnitude of the excess demand and the extent to which services from other airports are either available or represent an acceptable alternative for passengers. This last point means that if the constrained airport is subject to effective competition from a neighbouring airport fares may not rise very much, even if the airport is constrained, because a rise in fares would simply cause passengers to choose to fly from the other airport. Furthermore, these conditions of competition may differ between different market segments. For instance, two airports may be viable substitutes for short haul traffic but less so for long haul. If this is the case congestion may lead to a significant long haul premium, but little or no premium on short haul fares. If the capacity constraint is removed, new airlines can enter existing routes and this increase in airline competition ensures that prices fall. The change in ticket prices at the expanded airport therefore depends both on the level of excess demand and the substitutability of alternative airports. This complicates the relationship between capacity and ticket prices. Using a model of differentiated competition between airports, we have identified that: frontier economics 21

123 Competition & Choice 2017 Capacity constraints at one airport lead to higher prices not just at the airport itself, but at other airports that compete with the constrained airport. In these circumstances, expanding capacity at the unconstrained airport has no expected effect on ticket prices or passenger welfare. If both airports are constrained, then expanding capacity at either airport will lead to a fall in ticket prices at both airports and a benefit to passengers, but the effect is much greater if the expansion is focussed on the airport with a higher level of excess demand Capacity constraints and their effect in London The effects of capacity constraints are relevant for London airports because both Heathrow and Gatwick face capacity constraints. As demonstrated by Figure 7, Heathrow has been capacity constrained in terms of runway utilisation for over 10 years while Gatwick is now approaching full capacity for the first time. Figure 7 Runway utilisations at Heathrow and Gatwick Source: Frontier analysis based on schedules data from OAG Analyser and capacity data from the DfT: UK Aviation forecasts (2017) Furthermore, considering the total movements across the London airports in Figure 8, we see that again Heathrow is at maximum capacity while Gatwick is also near maximum capacity in terms of movements. However, by considering movements by hour as in Figure 9 and Figure 10, we see that Heathrow is at maximum movements for most hours of the day while Gatwick is not. This suggests that Heathrow faces a greater capacity constraint. 16 Furthermore, Gatwick is not an appropriate substitute for Heathrow s capacity because Heathrow is a major hub. This will be explored further in Section 4. frontier economics 22

124 Competition & Choice 2017 Figure 8 Movements across the London airports 2017 Source: Frontier analysis based on schedules data from OAG Analyser and capacity data from the DfT: UK Aviation forecasts (2017) Figure 9 Hourly movements for Heathrow in 2016 Source: Frontier analysis based on schedules data from OAG Analyser. frontier economics 23

125 Competition & Choice 2017 Figure 10 Hourly movements at Gatwick in 2016 Source: Frontier analysis based on schedules data from OAG Analyser. As a result of the current capacity constraints, the economic theory presented above leads us to expect that by 2030 a new runway at Heathrow Airport is likely to provide substantially greater benefits than adding another runway at Gatwick Airport because: By 2030 Heathrow Airport s excess demand is likely to be significantly higher than Gatwick s as it will have been constrained for more than 20 years while Gatwick would only have been constrained for about 10 years. Heathrow Airport s average fare is higher; passengers have a lower price elasticity because it offers a much greater proportion of long-haul flights and serves a higher number of business and premium passengers. The following sections provide empirical evidence that demonstrates that the impact on ticket prices is indeed bigger for Heathrow. 3.3 Descriptive analysis of ticket fares Before beginning the econometric analysis, we first compared the average OD fares at Heathrow versus other airports in London and Europe. Furthermore, we considered fares to destinations served by Heathrow that are also served by other airports, meaning there is an overlap between airports on the route Average fare analysis The average OD fares for all, short haul and long haul flights are shown in Figure 11 and Figure 12 for London airports and for European hub airports respectively. As shown in the figures, fares at Heathrow are on average higher than the other airports for all flights, including both short and long haul. However, the difference frontier economics 24

126 Competition & Choice 2017 in fares is smaller for European hub airports than for other London airports with Paris Charles de Gaulle Airport having the fares closest to Heathrow. Figure 11 Average OD fares at London airports in 2016 Source: Frontier Economics and IATA. Figure 12 Average OD fares at European hub airports in 2016 Source: Frontier Economics and IATA Overlap fare analysis Similarly, we can consider fare differences between the airports on specific overlapping routes. Figure 13 and Figure 14 below compare fares on routes shared at the London airports for short haul and long haul routes respectively. As frontier economics 25

127 Competition & Choice 2017 expected, Heathrow offers the most expensive fare for almost all of the overlaps, though the fare premium varies. Heathrow is not the most expensive to Hamburg, Lisbon and Zurich for short haul and to Mauritius for long haul. Figure 13 Subset of short haul overlaps between London airports 2016 Source: Frontier Economics and IATA. Figure 14 Long haul overlaps for London airports 2016 Source: Frontier Economics and IATA. Figure 15 and Figure 16 below show the average OD fares for short haul and long haul overlapping routes respectively. While Heathrow often offers the most expensive fares, other airports, especially Paris Charles de Gaulle, also offer high frontier economics 26

128 Competition & Choice 2017 fares that for some routes are even greater than the Heathrow fares. Thus, from graphical analysis alone, Heathrow appears to face a fare premium. Figure 15 Subset of short haul overlaps between European hubs 2016 Source: Frontier Economics and IATA. Figure 16 Long haul overlaps for European hubs 2016 Source: Frontier Economics and IATA. frontier economics 27

129 Competition & Choice Benefits of an expanded Heathrow To determine the effect of congestion on ticket prices, we have undertaken a detailed econometric analysis of ticket prices at Heathrow compared to other London and European hub airports. Our analysis controls for other relevant factors that influence ticket prices including journey purpose, distance, frequency, and low cost carriers, meaning that the remaining difference between Heathrow fares and other airport fares can be interpreted as a premium resulting from Heathrow s congestion constraint. A full description of the econometric methodology and results from all sensitives can be found in Annex A. As presented in Figure 17 and Figure 18, we estimated that in 2016, ticket fares at Heathrow were on average 23.3% higher than at other London airports and 24.4% higher than at other European hub airports due to the congestion premium. Put differently, because Heathrow is capacity constrained, passengers face higher ticket prices compared to both London and other European hub airports. On a return flight basis, this means that over the course of 2016, the congestion premium cost passengers at Heathrow roughly 2 billion. 17 Thus, even if the congestion premium remains stable in the future, the cost to passengers of Heathrow expansion could be offset in only eight years by alleviating the congestion premium. Figure 17 Congestion premium results: London airport sample Routes 2016 Estimates 2016 Range 2016 Range ( ) All flights 23.3%*** 23.3%*** to 35.7%*** Short haul only 28.3%*** 23.9%*** to 28.8% Long haul only 9.44% 9.44% to 40.5%*** Source: Frontier Economics Figure 18 Congestion premium results: European hub airport sample Routes 2016 Estimates 2016 Range 2016 Range ( ) All flights 24.5%*** 15.0%*** to 25.8%*** Short haul only 22.8%*** 12.4%*** to 22.8%*** Long haul only 18.8%*** 7.3% to 31.9%*** Source: Frontier Economics To determine how the congestion premium varies by short and long haul flights, we have repeated the estimation of both equations on short and long haul flights separately for both flight samples. The results of this are also reported in Figure 17 and Figure 18. From this analysis, it appears that both short and long haul flights face a significant and large premium of 22.8% and 18.8% respectively compared to other European hub airports. 18 This translates to 24 and 79 premium on a one-way flight compared to other European hub airports for short haul and long haul flights 17 We assume that the congestion premium on inbound flights is equal to the premium on outbound flights. We apply the short haul premium of 28 to short haul flights and the mid-point of the long haul premium of 99 to long haul flights over short and long haul passengers respectively. 18 As described on page 61 of the 2014 report Impact of airport expansion options on competition and choice, the short and long haul congestion premiums need not lie between the average premium estimate due to the matrix estimations and covariances that are taken into account. frontier economics 28

130 Competition & Choice 2017 respectively. Thus, regardless of the type of flight from Heathrow, passengers face a congestion premium compared to other European hub airports. Compared to other London airports, Heathrow faces a significant congestion premium on short haul flights of up to 28%, which is equivalent to a 28 premium on a one-way flight. For long haul flights, the results are less clear. At first glance, the premium on long haul flights appears smaller at 9.44% or 42 per one-way flight and statistically insignificant. However, this interpretation is not straight forward for three reasons. First, the sample size for long haul flights is small, at only 126 observations. Thus, we should not expect to find a significant result due to the small sample size so we cannot conclude that there is not a premium on long haul flights. Second, Heathrow accounts for approximately 66% of all long haul observations making it more difficult to isolate the specific Heathrow effect. Finally, all of the regressions, but especially the long haul only regressions, are subject to multicollinearity. That is, the regressors are extremely correlated. For example, for long haul flights, 30% of passengers are transfer passengers at Heathrow while only 7% are transfer passengers at Gatwick, meaning that the transfer passenger variable is highly correlated with the Heathrow dummy variable. Because of the high correlation among regressors, the actual effect from the capacity constraint might not be picked up fully by the Heathrow dummy variable as our regression specifies. Thus, the premium on long haul flights may well be understated. To determine whether our results are sensitive to multicollinearity, we test other sensitives to observe how the congestion premium estimates change. We use sensitivities that omit one variable at a time as well as run sensitivities including only observations for routes shared by at least two of the other London airports. From this analysis, we observe a range of long haul estimates from 9.8% to 40.5%. Thus, we can conclude that although the premium for long haul flights is difficult to estimate precisely, a premium clearly exists that could be as large as 40.5%, which is equivalent to a 143 premium on a one-way flight. While our estimates on the congestion premium vary as shown by the ranges presented in Figure 17 and Figure 18, this does not cast doubt on our conclusion that Heathrow faces a congestion premium as a result of its restricted capacity. There does not exist a perfectly correct and unique model for this estimation as it faces problems such as multicollinearity as described above. Thus, testing different specifications and comparing the range of results is a robust method to ensure conclusions remain valid. In all cases, Heathrow s estimates show a large congestion premium that is statistically significant in most specifications, meaning that while the exact size of the estimate can be questioned based on the chosen model, a congestion premium clearly exists. Furthermore, our estimate of Heathrow s congestion premium seems broadly in line with other analyses. For example, a 2013 report by PWC focusing on European airports found that when an airport becomes severely constrained, average fares increase by 18%. 19 A 2017 report by SEO Amsterdam Economics found that on average congestion premiums cost passengers in Europe 5.65 for a return flight 19 PWC (2013). Fare differentials. Analysis for the Airports Commission on the impact of capacity constraints on air fares. frontier economics 29

131 Competition & Choice 2017 in However, as this is an average figure, they note that the relationship between capacity constraints and air fares is likely to be exponential with excessively higher air fares at the most congested airports. Thus, as the most constrained airport in Europe, Heathrow is likely to have a much higher premium Heathrow s capacity constraint over time While we find that Heathrow has a congestion premium on all routes in comparison to both other London airports as well as other European hub airports, we can also compare our 2016 estimates to 2012 estimates to see how the congestion premium has developed over time. Figure 19 and Figure 20 show the 2012 and 2016 estimates for the London and European hub samples respectively. Figure 19 Congestion premium over time: London airports Routes 2012 Estimates 2016 Estimates All flights 18.0%*** 23.3%*** Short haul only -4.3% 28.3%*** Long haul only 16.8% 9.44% Source: Frontier Economics and Impact of airport expansion options on competition and choice (2014). Note: *** means the result is statistically significant at the 1% level. ** means significant at the 5% level. * means significant at the 10% level. Figure 20 Congestion premium over time: European hub airports Routes 2012 Estimates 2016 Estimates All flights 23.8%*** 24.5%*** Short haul only 22.9%*** 22.8%*** Long haul only 20.3%*** 18.8%*** Source: Frontier Economics and Impact of airport expansion options on competition and choice (2014). Note: *** means the result is statistically significant at the 1% level. ** means significant at the 5% level. * means significant at the 10% level. As shown in the tables, since 2012, the overall congestion premium at Heathrow has increased. Compared to the other London airports, the premium is approximately 5% higher in 2016, and compared to European hubs, the premium is almost 1% higher. In terms of actual fares, this translates from a one-way markup on the average ticket price of 45 in 2012 to a one-way mark-up of 59 in Additionally, it appears that compared to other London airports, short haul flights at Heathrow have become constrained since 2012, as in 2016, there is a large and statistically significant congestion premium. Finally, compared to other European hub airports, short haul flights face a similar premium in 2016 as in 2012 while the premium on long haul flights has decreased by about 1.5%. We can also use DfT demand forecasts and the price elasticity of demand to estimate that if Heathrow remains constrained without an additional runway, by 2030, ticket fares at Heathrow should be 50% higher than they are currently, which 20 SEO Amsterdam Economics (2017). The impact of airport capacity constraints on air fares. 21 In addition the SEO report takes its measure of congestion as the ratio of capacity utilisation. Hence it does not necessarily measure excess demand at all. Arguably it is only a measure of the additional costs imposed on airlines by operating at very busy airports, which is a different issue. 22 Frontier Economics and Impact of airport expansion options on competition and choice (2014). frontier economics 30

132 Competition & Choice 2017 corresponds to a one-way price increase of 64 and 247 for short and long haul flights respectively. Across all estimated passengers, this corresponds to a congestion premium cost of roughly 8 billion in 2030 valued in 2016 GBP. 23 This means that in the future without expansion, the effect of congestion on ticket prices will only grow larger. 3.5 Benefits of an expanded Gatwick We have undertaken the same econometric analysis for Gatwick and found that, as in 2012, there is still no evidence that ticket prices are higher than the average fares from other London airports after controlling for all relevant factors such as trip purpose, low cost carriers, and distance. As shown by Figure 21, the estimated congestion premium is small in magnitude and negative for all flights and short haul flights and is small in magnitude but positive for long haul flights. However, in all cases the estimates are not statistically different from zero. This implies that the reduction in ticket prices from releasing the constraint at Gatwick would be nonexistent today. Figure 21 Source: Frontier Economics. Gatwick congestion premium estimates Routes 2016 Estimates All flights -2.6% Short haul only -1.3% Long haul only 3.2% Note: *** means the result is statistically significant at the 1% level. ** means significant at the 5% level. * means significant at the 10% level. However, as Gatwick s constraint will continue into the future without expansion, we have applied the same methodology as for Heathrow to identify the impact of the constraint at Gatwick in We have used the DfT demand forecast to calculate the difference between unconstrained and constrained demand at Gatwick in 2030 and have applied the same price elasticity of demand. Using this approach, we find that by 2030, fares at Gatwick would be 32% higher than today, which is equivalent to a 24 and 83 increase in one-way fares for short and long haul flights respectively. Across all estimated passengers, this corresponds to a congestion premium cost of roughly 1 billion in 2030 valued in 2016 GBP. 24 Thus, the benefits for passengers from expanding Gatwick continue to be lower in the future compared to the benefits of expanding Heathrow. 23 This figure corresponds to multiplying the estimated premiums of 64 and 247 by DfT s estimated passengers at a 2 runway Heathrow in 2030 (86 million) after removing 36% of passengers which are transfer and accounting for the proportion of short and long haul passengers based on 2016 figures. Thus, this figure is not a discounted value over time but is the actual cost in 2030 valued in 2016 GBP.. 24 This figure corresponds to multiplying the estimated premium of 24 and 83 by DfT s estimated passengers at a non-expanded Gatwick in 2030 (45 million) after removing 8% of passengers which are transfer and accounting for the proportion of short and long haul passengers based on 2016 figures. Thus, this figure is not a discounted value over time but is the actual cost in 2030 valued in 2016 GBP. frontier economics 31

133 Competition & Choice Comparing Heathrow and Gatwick Expansion Considering the effects of capacity constraints on ticket prices, we conclude that expanding Heathrow Airport would provide greater benefits to passengers than expanding Gatwick Airport. In particular, we have demonstrated the following: While expanding Gatwick would have some impact on the prices at Heathrow, the same applies in reverse. Overall, the effect of a Heathrow Airport expansion on ticket prices is larger than the impact of a Gatwick expansion on prices. Releasing the capacity constraint at Heathrow today (if it were possible) would result in a reduction of one-way ticket prices of 23%. In contrast, additional capacity at Gatwick today would not reduce ticket prices. Expanding Heathrow Airport in 2030 would result in a reduction in one-way ticket prices of 64 and 247 for short and long haul flights respectively compared to a reduction in ticket prices as a result of Gatwick Airport expansion of 24 and 83 for short and long haul flights respectively. Across all estimated passengers in 2030, this corresponds to a congestion premium cost of roughly 8 billion and 1 billion at Heathrow and Gatwick respectively. frontier economics 32

134 Competition & Choice CONNECTIVITY AND CATALYTIC BENEFITS In this section we summarise the results of our analysis to estimate the long haul connectivity benefits of expanding Heathrow and Gatwick and to quantify the catalytic impact of each option. 4.1 Connectivity analysis Heathrow is the UK s key gateway to long haul markets The AC set out the importance of the UK maintaining its international hub status and of the need to provide extra capacity to connect to long haul markets. Figure 22 The AC recommended Heathrow because it is best for long haul 2012 We are responsible for recommending options for maintaining the UK s status as an international hub for aviation. We will assess the environmental, economic and social costs and benefits of various solutions to increase airport capacity - considering operational, commercial and technical viability 2015 At the end of this extensive work programme our conclusions are clear and unanimous: the best answer is to expand Heathrow s capacity through a new northwest runway. Heathrow is best-placed to provide the type of capacity which is most urgently required: long haul destinations to new markets. Source: Airports Commission The hub and spoke model provides a boost to long haul connectivity. Network carriers operating at hubs attract transfer passengers which supplement the O/D demand, thereby increasing the total demand for individual flights. For some more marginal destinations, this extra demand may make the difference between a connection being viable, or not being viable and therefore not being provided. The vast majority of airlines at Heathrow are network carriers, whereas Gatwick is dominated by low cost carriers (LCCs). The hub and spoke model requires airlines to coordinate arrivals and departures across the network, with a wave of short haul arrivals typically preceding a wave of long haul departures. LCCs tend to not provide connecting services, and prefer instead to concentrate on having short turnaround times and operating as many rotations as possible per day, with little regard for coordinating the timing of departures and arrivals across different routes. frontier economics 33

135 Competition & Choice 2017 Figure 23 The hub and spoke model boosts long haul connectivity Hubs (like Heathrow) can attract transfer passengers to supplement local demand F E A X D B C Point to point airports (like Gatwick) can only draw on local demand F E A X D B C LHR mostly network carriers LGW mostly LCCs 35% 3% 3% 3% 3% 53% British Airways Aer Lingus Virgin Atlantic Lufthansa American Airlines Other Source: Frontier analysis based on 2017 schedules data from OAG Analyser It is for this reason that Heathrow has emerged as the UK s key gateway to long haul markets. There are a grand total of 115,000 long haul departures scheduled across all UK airports in Around 75% are at Heathrow. Only 11% are at Gatwick. Gatwick states that it serves more than 50 long haul destinations. 25 However, this statistic overlooks frequency. As illustrated below, if we only count long haul destinations that have at least 365 departures scheduled in 2017 (i.e. on average at least daily), Heathrow has 53 long haul connections, and Gatwick only has 10. If we increase this frequency threshold to at least 730 departures in 2017 equal to twice daily on average Heathrow has 38 and Gatwick has 5. 3% 4% 4% 9% 20% easyjet 16% 44% British Airways Norwegian Thomson Ryanair Monarch Other 25 For example, see Gatwick s press release from 2016: frontier economics 34

136 Number of connections Competition & Choice 2017 Figure Gatwick claims to serve more than 50 long haul destinations but this overlooks frequency >=365 departures: LHR: 53 LGW: 10 >=730 departures: LHR: 38 LGW: 5 Departures (2017) LHR LGW Source: Frontier analysis based on 2017 schedules data from OAG Analyser If we count all destinations regardless of frequency, then Gatwick does serve nearly 60 long haul destinations. However, by way of illustration, this includes Krabi, Thailand which has just two departures scheduled for the whole of Gatwick s long haul connections are less frequent than those at Heathrow, and they tend to be to leisure destinations. Gatwick s top 10 most frequent long haul destinations include Orlando (which is its most frequent with around 3.7 departures per day on average), Barbados, Cancun, St Lucia, Antigua and Las Vegas. frontier economics 35

137 New York Dubai Newark Los Angeles Chicago Hong Kong Doha Delhi Singapore Toronto Orlando Dubai Barbados New York Toronto Cancun St. Lucia Antigua Vancouver Las Vegas Departures (2017) Departures (2017) Competition & Choice 2017 Figure 25 Top 10 most frequent long haul destinations at Heathrow and Gatwick in ,000 7,000 LHR 8,000 7,000 LGW 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1, JFK DXB EWR LAX ORD HKG DOH DEL SIN YYZ MCO DXB BGI JFK YYZ CUN UVF ANU YVR LAS Source: Frontier analysis based on 2017 schedules data from OAG Analyser Forecasting new long haul connections We have estimated the number of new long haul connections which could be added in the future following expansions at Heathrow and Gatwick. This is based on analysing 2016 PaxIS data on passenger flows at both airports. We have extrapolated demand at the route level at each airport individually by multiplying current demand by a growth rate which takes into account the forecasts for GDP growths of the origin and destination countries and income elasticities of demand. Figure 26 We extrapolate demand at the route level Demand t+1 Demand t 1 Weighted average GDP growth rate of origin and destination country Income elasticity of demand Based on IATA PaxIS data IMF GDP growth forecasts & CAA for mix of traffic Based on literature review The analysis below provides a worked example for O/D passengers flying between Heathrow and Beijing, China (PEK). frontier economics 36

138 Competition & Choice 2017 Figure 27 Worked example LHR-PEK We can observe a detailed breakdown of demand Example: LHR-PEK O/D Value Source Dublin LHR Beijing Seoul UK GDP growth forecast 1.7% IMF China UK GDP growth forecast 6.0% IMF Share of UK demand 54% CAA Our analysis takes into account LHR s 75 million passengers, split out across the route level. We forecast demand on each O/D pair separately. Source: Frontier analysis Dubai Weighted average GDP growth forecast 3.7% Income elasticity of demand 1.39 IATA Annual unconstrained growth forecast 5.1% However, in the case of forecasting demand at Heathrow, because it is constrained, we need to ensure that we are extrapolating from an unconstrained starting point. Or in other words, if we applied the unconstrained growth rate to current passenger volumes we would be understating future demand. Therefore, we first need to estimate where demand would be today if Heathrow were not constrained. To do this, we have first considered demand at Heathrow in 2006 (the year Heathrow first became constrained). Since this point, demand has only grown at a constrained rate. Therefore, we have applied the historical unconstrained growth rates (e.g. the same approach described above but using historical GDP growth rates) to volumes in 2006 back to the present day. Having estimated unconstrained demand today, we have then extrapolated from this point. This approach is illustrated below. frontier economics 37

139 Passengers (millions) Competition & Choice 2017 Figure We need to extrapolate from an unconstrained starting point There would be more passengers at Heathrow today if it were unconstrained. We need to extrapolate from this point Applying the unconstrained growth rate to current demand would understate future demand Historical 3R constraint released 2R 3R constraint not released Source: Frontier analysis We have not performed the same calculation for Gatwick because it was not constrained during this period as evidenced by its recent growth from 39.6 million passengers in 2015 to 42 million passengers in 2016 (6%). We have used 2030 as the focus year in our analysis. This is because the DfT has forecasted that an expanded Heathrow would be constrained by around this time, and therefore demand can only grow at unconstrained rate up to this point. Our forecasts are in line with estimates from the DfT, and the underlying growth forecasts are broadly in line with those from Airbus and Boeing as shown in Figure 29. frontier economics 38

140 Growth rates Competition & Choice 2017 Figure 29 Our forecasts are broadly in line with those from other sources In 2030, we forecast 86 million passengers at LHR 2R and 132 million passengers at LHR 3R. This is in line with the DfT s forecasts Our implied growth rates are also broadly in line with those from Airbus and Boeing Weighted average O/D demand by global region annual growth 8% 7% 6% Our forecasts are at the route level at Heathrow specifically, whereas the Airbus and Boeing forecasts are at the Western European and European levels respectively. Therefore, the relative mix of traffic across different countries is likely to vary 5% 4% 3% 2% 1% 0% Asia Africa Middle North East America Model Airbus Boeing South America Europe Source: Frontier analysis of data from the DfT UK Aviation forecasts 2017; Airbus Global market forecast ; and Boeing Current Market Outlook 2017 Next, we have considered the volume of beyond passengers at each airport flying to destinations which are currently not served by direct flights. Beyond passengers are O/D passengers who depart an airport and fly indirectly to their final destination (and are counted as transfer passengers at the connecting airport). If there are a sufficiently high number of passengers flying indirectly to a given destination, there could be enough demand to justify adding a new connection. However, we do not assume that all beyond passengers would switch to a new direct connection. For example, in 2016 at Heathrow, 22% of O/D passengers flying to long haul destinations where a direct connection does exist still chose to fly indirectly. At Gatwick, the corresponding figure is 5%. This is largely because indirect ticket fares tend to be cheaper than direct fares. Therefore, to estimate the potential O/D demand for a new direct connection we have multiplied the total beyond demand by a switching factor of 78% at Heathrow and 95% at Gatwick. In assessing beyond passengers, we have considered demand at Heathrow and Gatwick separately, rather than pooling them together. This is because as discussed in the next subsection we believe that there is no evidence to suggest that demand at a Heathrow would overflow to Gatwick. We have then considered potential additional demand from transfer passengers. According to the 2016 CAA Passenger Survey, 36% of passengers at Heathrow were transfer passengers in At Gatwick, the corresponding figure was 8%. 26 Therefore we have applied an uplift to the O/D beyond demand assumed to switch to the direct connection. 26 CAA Passenger Survey Report ger_survey/caa%20passenger%20survey%20report% pdf frontier economics 39

141 Competition & Choice 2017 A walked-through example of our approach, using the case of Santiago, Chile is set out below. This analysis is based on 2016 PaxIS data. In 2017, BA announced a new connection to Santiago suggesting that the approach has some predictive power. Figure 30 Worked example Santiago, Chile In 2016, 33,000 O/D passengers flew indirectly from LHR to Santiago, Chile. We estimate that if LHR were unconstrained there would have been around 41,000 passengers. We estimate future unconstrained growth at 3% per year. By 2030 demand would increase to around 63,000 O/D passengers. At LHR, where direct long haul connections exist 22% of O/D passengers still choose to fly indirectly. Therefore, we would expect that 49,000 passengers would switch to a direct flight if it were added. Also, transfer passengers represent 36% of passengers at Heathrow. Therefore, we estimate a further 28,000 transfer passengers would fly on the route. This brings total demand to around 77,000 passengers per annum. Source: Frontier analysis based on 2016 PaxIS data Madrid Heathrow Santiago Sao Paulo Finally, we assume a new connection is added if the potential demand for a direct flight (O/D plus transfer) is greater than a passenger threshold. Clearly, the threshold depends on the assumed frequency of the new flight. At Heathrow in 2016, the average long haul departure carried around 220 passengers. We have assumed that average load per departure increases by 1%, which is broadly in line with the increase since Therefore, by 2030, a daily long haul connection could be expected to carry around 90,000 passengers. A twice weekly connection could be expected to carry 26,000. The chart below sets out the long haul connections which we estimate could have enough demand to satisfy at least a twice-weekly connection. 27 This does not include new connections at Heathrow which already exist at Gatwick today e.g. we also identified Orlando and Havana as potential new long haul connections at Heathrow but they are already available at Gatwick today. 27 Different frequency thresholds could be applied, where clearly the higher the threshold, the lower the number of connections that meet the definition and vice versa. Analysis of schedules data at Heathrow and Gatwick over the period suggests that when a new long haul connection was added at Heathrow the frequency was about 2.6 times per week on average, and about 1.0 times per week on average at Gatwick. frontier economics 40

142 Competition & Choice 2017 Figure 31 We estimate that an expanded Heathrow could add over 40 long haul connections by 2030 Source: Frontier analysis Note: Heathrow to Australasia is over 9,000 miles. However, we note that Qantas has announced plans to start a non-stop flight from Heathrow to Perth in 2018, suggesting that over time very long haul distances may be achievable. Whereas for Heathrow we identified over 40 new long haul connections, for Gatwick, we identified just two connections: St George s, Grenada; and Port of Spain, Trinidad & Tobago. (We also identified Bangkok, Thailand. However, this connection already exists at Heathrow). The table below summarises our results. Figure 32 New connections following expansion Twice weekly LHR 3R 46 LGW 2R 2 Source: Frontier analysis The results clearly show a large gap in long haul connectivity benefits between an expansion at Heathrow versus Gatwick. We note that this approach is conservative. The new connections would likely stimulate additional O/D demand (above and beyond the volume assumed to switch from indirect routings) i.e. passengers who only choose to fly because there is a direct connection and who would not have flown otherwise. However, to be conservative we have not included this demand in our analysis. frontier economics 41

143 Departures to long haul destinations ('000s) Competition & Choice Why can t the new connections at Heathrow just fly from Gatwick instead? It could be argued that the 40+ new long haul connections identified at Heathrow could simply fly from Gatwick instead. After all, these would be new connections for London. However, we do not believe this is valid. First, Heathrow attracts a significantly larger volume of transfer passengers than Gatwick (c36% of total passengers at Heathrow versus only 8% at Gatwick), meaning that even if all other things were equal, demand would be higher at Heathrow than at Gatwick. Secondly, there is limited evidence to suggest that underserved O/D demand at Heathrow would overflow to Gatwick. Heathrow has been constrained for over 10 years and Gatwick has had spare capacity during this time. Therefore, we might have expected to see an increase in long haul connectivity at Gatwick. However, in this time, long haul has failed to develop in any real significance at Gatwick. In fact, since 2006, Gatwick has actually seen a decrease in the total number of long haul departures from nearly 16,000 in 2006 to only 13,000 scheduled in And there has actually been an increase at Heathrow over the same period from 70,000 long haul departures in 2006 to 83,000 departures in 2017 despite being constrained. Clearly, this has come at the cost of squeezing out some short haul traffic. If this continues, it runs the risk of disturbing the balance between short haul and long haul that airlines need to operate a successful hub and spoke model. Figure Long haul has not taken off at Gatwick LHR LGW STN LTN LCY Source: Frontier analysis based on schedules data from OAG Analyser It is difficult to argue that passengers are indifferent between London airports when there a congestion premium at Heathrow and spare capacity at other London airports. frontier economics 42

144 Competition & Choice 2017 New and lost long haul connections We have analysed schedules data at the route level at Heathrow and Gatwick over the period to identify the change in the number of long haul connections at each airport. Figure 34 The change in the number of frequent long haul connections at Heathrow and Gatwick 28 Heathrow Gatwick New long haul connections Lost long haul connections 8 11 Net change Source: Frontier analysis based on schedules data from OAG Analyser The results show that despite there being capacity constraints at Heathrow and spare capacity at Gatwick, Gatwick did not see an increase in its number of long haul connections, while Heathrow actually saw an increase. Figure 35 Gatwick lost 11 long haul connections over the period Charlotte, USA Atlanta, USA Mexico City, Mexico Port of Spain, Trinidad Free Town, Sierra Leone Beijing, China Qatar Accra, Ghana Mombasa, Kenya Harare, Zimbabwe Seoul, South Korea Hanoi, Vietnam Ho Chi Minh City, Vietnam Jakarta, Indonesia Source: Frontier analysis based on schedules data from OAG Analyser Note: In addition to the 11 frequent connections which were lost, Gatwick also lost direct connections to Hanoi and Ho Chi Minh City (but they did not meet the >=100 departures threshold). Incidentally these routes were switched to Heathrow and then became more frequent. Gatwick also had a connection to Jakarta but it had a scheduled stop over at Amsterdam along the way. However, this was also lost at Gatwick, and switched to Heathrow where it became a direct connection. 28 In assessing which long haul routes have been added we have only considered routes which went from having zero departures in one year to at least 100 departures in later years. For lost connections, we have only considered routes which went from having at least 100 departures in one year, and then zero departures in later years. Applying this threshold weeds out routes which were served with only very low frequency. For example, there are some routes which had just one departure in a year. frontier economics 43

145 Departures Departures Departures Departures Departures Departures Competition & Choice 2017 Figure 36 1,800 1,600 1,400 1,200 1, The details of the lost connections at Gatwick highlight that it struggles to sustain long haul connectivity. Many of the lost connections at Gatwick were switched to Heathrow, where airlines can attract a greater volume of transfer passengers. For example, US Airways [later American] operated a daily connection between Gatwick and Charlotte Douglas, North Carolina. However, this was switched to Heathrow in 2013 and later became a twice-daily connection: From our perspective, if you look at the portfolio of flying we already do to Heathrow, it made a lot of sense, Chuck Schubert, American s vice president of network planning [American subsequently merged with US Airways. American is also a member of oneworld, alongside BA]. Our new daily flight between our Charlotte hub and Heathrow connects customers in markets throughout the East Coast to London's preferred business and tourism hub. Suzanne Boda, US Airways Senior vice president Other examples are illustrated below. Many of the lost connections at Gatwick switched to Heathrow and became more frequent ATL - Atlanta - USA LHR LGW CLT - Charlotte - USA LHR LGW 1,200 1, PEK - Beijing - China LHR LGW 3,000 2,500 2,000 1,500 1, DOH - Doha - Qatar ,200 1, ICN - Seoul - Korea Republic of MEX - Mexico City - Mexico LHR LGW LHR LGW LHR LGW Source: Frontier analysis based on schedules data from OAG This highlights that airlines are unwilling to develop long haul operations at Gatwick. Heathrow is best placed to serve London demand In addition to being a hub airport, Heathrow also benefits from having better surface access links than Gatwick. 100% of London lies within a 75 minute peak drive time of Heathrow. However, for Gatwick, large parts of north London lie beyond a 75 minute peak drive time. frontier economics 44

146 Competition & Choice 2017 Figure 37 Heathrow is best placed to serve London demand Heathrow Gatwick Significantly better surface access to/from the area west of London from the M3 to the M % of London within 75 minute peak drive time Peak drive times Red 15 minute drive time Orange 30 minute drive time Yellow 45 minute drive time Light green 60 minute drive time Dark green 75 minute drive time Blue 90 minute drive time Source: Quod Heathrow is accessible on the Piccadilly Line, and the upcoming Elizabeth Line / Crossrail. (There are also tentative plans for a new connection between Heathrow and Old Oak Common, with Old Oak Common being a station on HS2 that will provide a high speed rail connection from London to Birmingham and then on to Manchester, Sheffield and Leeds). Additionally, the Heathrow Express provides a quicker service to central London (15 minutes to Paddington) than the Gatwick Express (30 minutes to Victoria). These points combined suggest that Heathrow will continue to be best placed to serve London demand and beyond. The concept of generalised travel cost (GTC) argues that when passengers consider whether to fly, they take into account ticket fares and the monetised value of travel time. Therefore, all other things being equal, given that Heathrow is more conveniently located and accessible than Gatwick, we would expect O/D demand to be greatest under a Heathrow expansion scenario Split hubs deliver inferior connectivity outcomes Given that hub airports provide a boost to long haul connectivity, it could be argued that an expanded Gatwick could also develop into a hub. For example, Heathrow could operate as the long haul hub for the Americas, and Gatwick could operate as the long haul hub for the rest of the world. At first glance, this may sound like a sensible option. However, there are several short comings with a two-hub or splithub model. Intercontinental transfers would not be possible: The first issue with such an approach is that it would not provide for intercontinental transfers e.g. passengers wishing to connect from North America to Africa. In 2016 at Heathrow, over 3.5 million transfer passengers flew between the Americas and rest of the world destinations (excluding Europe). And by 2030, we estimate that, without capacity constraints, there could more than 10 million passengers frontier economics 45

147 Competition & Choice 2017 flying on these routes. Therefore, a Heathrow expansion would be able to attract more transfer passengers than a Gatwick expansion. This will increase the overall demand for individual routes, and will provide the UK with more direct connections. Clearly this a benefit to O/D demand in the UK, (as well as to transfer passengers who may have more convenient connections via Heathrow). Some routes are only viable because of these passengers. For example, in 2016, nearly 70% of all passengers flying on the connection from Heathrow to Hyderabad were transfer passengers from North America. The Hyderabad connection is daily, and clearly it would not be possible (at least at the same frequency) without this demand. Losing this route would represent a weakening of connectivity for O/D passengers and ultimately be a loss for the UK. Other routes may still survive even without these transfer passengers. However, because total demand would be lower without these passengers, frequency would therefore have to be reduced. This too would represent a weakening of connectivity for O/D passengers who would lose the flexibility and choice of having multiple frequencies. Short haul routes would have to be duplicated: Under the split hub model, European connections would have to fly to both Heathrow and Gatwick otherwise not all long haul connections would be possible. E.g. passengers wishing to fly from Inverness to the US would need to fly via Heathrow, and passengers wishing to fly from Inverness to Asia would need to fly via Gatwick. Similar to the above, some marginal routes may not have enough demand to support two separate routes. And those which did would still have a reduction in frequency. We have repeated the analysis above to model the number of long haul connections which would be possible under the split hub approach. Figure 38 New long haul connections under different expansion scenarios (twice weekly frequency) LHR 3R LGW 2R Split hubs Long haul Source: Frontier analysis The results highlight that a split hub scenario would be an inferior outcome compared to a Heathrow expansion. This is driven by the fact that the system as a whole would lose a considerable volume of transfer passengers. The results are also likely to be an overestimate because the analysis implicitly assumes that O/D demand will fly from Gatwick e.g. if all long haul connections to Asia are moved to Gatwick that the O/D demand will follow. However, as set out in the previous subsection, we consider this to be a stretch. 4.2 Catalytic impact The logic behind catalytic impacts is that if Heathrow were to expand, more passengers would be able to fly directly to their final destination. Given that this is quicker and more convenient than flying indirectly, this would lead to an overall increase in O/D demand or in other words, some passengers would only chose frontier economics 46

148 Competition & Choice 2017 to fly because there is a direct connection. This in turn would lead to an increase in the number of face to face business meetings, and consequently facilitate more trade, foreign direct investment and tourism and ultimately GDP. This is illustrated below in Figure 39, which provides greater detail on the underlying methodology. Figure 39 The catalytic impact of third runway at Heathrow We have estimated the catalytic impact under both expansion options. Our results are shown below in Figure 40. We estimate that by 2030, the catalytic impact of the third runway at Heathrow would be equal to around 3.7 billion, driven predominantly by an increase in O/D demand to the USA and China which combined represent more than 50% of the total impact. frontier economics 47

149 Competition & Choice 2017 Figure 40 Catalytic impact under expansion options Source: Frontier analysis From 2030 onwards, we assume that the catalytic impact associated with each individual partner country grows at a constrained rate equal to the average GDP growth rate between the UK and the partner country. This is to reflect that as productivity grows over time, the GDP benefits associated with a given volume of traffic would also be expected to grow. The total impact grows at around 2.5% per annum. The DfT has also produced a phased capacity profile which assumes that by 2030, just over 50% of the incremental capacity will have been phased into operation, gradually reaching 100% by around To reflect this gradual phasing of incremental capacity, we have multiplied the catalytic impact results by the percentage of incremental capacity assumed to be introduced in each year. This has the effect of reducing the catalytic impact in the early years (given by the dotted red line in the illustration above). For Gatwick, we estimate that in 2030 the catalytic impact would be equal to around 0.6 billion (or around 16% of the potential total under the Heathrow expansion scenario) with the USA and Canada representing around 70% of the total figure. The DfT assumes that Gatwick will only become constrained by 2050, meaning that the catalytic impact would grow at an unconstrained rate each year up until that point, rising to around 2.8 billion by 2050, or just under 50% the size of the impact at Heathrow at that time. From this point however, the catalytic impact with each partner country would grow at a constrained rate. The total figure increases by around 2.3% per annum marginally lower than the growth at Heathrow. This is because of differences in the relative mix of traffic at both airports e.g. Heathrow has a greater share of traffic to faster growing economies such as China and India, whereas Gatwick s impact largely comes from North America. frontier economics 48

150 USA CHINA CANADA HONG KONG INDIA AUSTRALIA JAPAN SOUTH AFRICA BRAZIL KAZAKHSTAN OTHER USA CANADA MOROCCO MEXICO MAURITIUS EGYPT UAE ALGERIA THAILAND CHINA OTHER Competition & Choice 2017 The chart below shows a snapshot of the results in 2050, at which point both Heathrow and Gatwick are assumed to be fully constrained. Figure 41 Catalytic impact in ,500 2,000 1,500 1, Heathrow 2050 million 2,500 2,000 1,500 1, Gatwick 2050 million 0 0 Source: Frontier analysis Again, we note that in our analysis we do not assume that unserved demand at a constrained Heathrow would overflow to an expanded Gatwick, and vice versa. This is based on the evidence presented in the previous subsection that Gatwick has not emerged as a substitute for Heathrow with respect to long haul connectivity. Therefore, the benefit from expansion at Gatwick effectively arises from extrapolating the long haul demand which already exists there today. Given that comparatively few passengers fly indirectly from Gatwick to China, the catalytic impact of a Gatwick expansion with respect to China is virtually zero. There is a reasonable share of traffic to North America at Gatwick. However, this is still dwarfed by the size of North American traffic at Heathrow Estimating the net present value of the impacts In its analysis, the DfT estimated the net present value (NPV) of the economic impacts of both expansion options over a 60 year appraisal period, starting from the assumed opening year of each option (2025 to 2084 for Gatwick, and 2026 to 2085 for Heathrow). A discount rate of 3.5% was used for the first 30 years, and 3.0% thereafter. Therefore, for comparability, we have performed the same calculation. The NPV for the catalytic impacts are as follows: Heathrow (assuming immediate phasing of capacity): 113 billion Heathrow (assuming a gradual introduction of capacity): 102 billion Gatwick (assuming immediate phasing of capacity): 41 billion The results for Heathrow are therefore more than twice that of Gatwick, further highlighting the case for expansion at Heathrow. frontier economics 49

151 Competition & Choice How do our results compare to other estimates? The figures above represent only the catalytic impact of expansion. However, there are other benefit types. The DfT has estimated the total benefits to passengers and the wider economy of both the Heathrow and Gatwick expansions, which covers the following benefit types: Passenger benefits. This includes the reduction in the congestion premium, and time saving benefits associated with there being fewer delays and greater frequency. This component represents the majority of the DfT s figures; and Government revenue. For example, this includes the extra revenue generated from APD associated with the increased demand. Wider Economic Benefits. These include increased business output and a tax component. The DfT estimated an impact of up to 74 billion in NPV terms at Heathrow, and up to 75 billion in NPV terms at Gatwick. Figure 42 DfT: Cumulative benefits to passengers and the wider economy by forecast year (present value, bn, 2014 prices) Source: DfT: Figure 9.3. Updated Appraisal Report. Airport Capacity in the South East Note: The chart shows total benefits to passengers and the wider economy using the upper end of the wider economic impact range. We note that the two impacts our catalytic impact and those estimated by the DfT are based on separate methodologies and capture different benefit types. We consider the results to be largely additive. Following expansion, passengers of all trip purposes will pay lower air fares (captured by the DfT s passenger benefits), and in parallel, additional trade and FDI would be facilitated because more business passengers will be able to fly (catalytic). These two impacts occur in parallel. frontier economics 50

152 Competition & Choice 2017 Therefore, taken together, based on our latest figures, the catalytic impact and the DfT s impacts could lead to a total benefit of up to 187 billion for Heathrow and 116 billion for Gatwick. To further place this result in context, the AC also produced various GDP impact estimates based on PWC s spatial computable generated equilibrium (S-CGE) model of the UK economy. In principle, the CGE approach is designed to be a holistic one and captures how an expansion at each airport would impact on the UK s GDP recognising that there would be lower air fares, more passengers, a reduction in journey times, and greater productivity brought about by there being more trade and FDI. The AC considered various future scenarios and states of the world, which varied in terms of operational assumptions (e.g. the low cost is king scenario assumed that low cost travel would be especially more prominent going forward), and macroeconomic assumptions (e.g. the global growth scenario assumed that GDP growth rates would be higher than the more base case conservative assumptions). The table below sets out the AC s results for both expansion options based on the S-CGE approach: Exhibit 1. The AC s NPV GDP impacts from expansion at LHR and LGW ( bn) Source: Airports Commission 2. Economy: Wider Impacts Assessment Tables 11 & 29. The AC estimated that the potential impact of expansion at Heathrow could lie within the range of 112 billion billion, while the expansion at Gatwick could lie within the range of 42 billion billion. While these estimates were based on the older DfT passenger forecasts, we see that our new NPV estimates of 187 billion at Heathrow and 116 billion at Gatwick lie within these ranges and help to highlight further that the third runway will have a significant impact on the UK economy. frontier economics 51

153 Competition & Choice CONCLUSION The purpose of this report is to assess the impact of both expansion options on passengers in light of DfT s updated passenger demand forecasts. We consider three main areas: Observations on the DfT s updated forecasts and economic appraisal; An estimate of the congestion premium at Heathrow, that is the extent to which fares are elevated at Heathrow as a direct result of existing capacity constraints; and A comparative estimate of the connectivity and catalytic (trade and FDI) benefits of expanding Heathrow and Gatwick. Our assessment shows that Heathrow Airport expansion provides substantially higher benefits to passengers than expanding Gatwick Airport because: The reduction in ticket prices from expansion at Heathrow is substantially larger compared to Gatwick. If Heathrow were expanded today, ticket fares would decrease by 23% relative to other London airports as a result of removing the capacity constraint. In terms of one-way ticket fares, that s a reduction of 59. By 2030 the impact of the capacity constraint will have risen, increasing fares at Heathrow by 50%. Gatwick, on the other hand, does not currently face a congestion premium, and by 2030 will face a fare increase of only 32%. The increase in connectivity is much larger for expanding Heathrow compared to Gatwick. Expanding Heathrow Airport would provide over 40 new connections for London. This contrasts with only 2 connections for London from expanding Gatwick Airport. Finally, in terms of the catalytic impact provided by a new runway, the estimate for Heathrow is more than two times that for Gatwick, and 102 to 113 billion for Heathrow while only 41 billion for Gatwick. Our overall conclusions apply under all likely future market developments. Expanding Heathrow Airport would lead to substantially greater reductions in ticket prices and greater connectivity. frontier economics 52

154 Competition & Choice 2017 ANNEX A CONGESTION PREMIUM ANALYSIS A.1 Introduction This annex sets out the methodology used in estimating the congestion premium at Heathrow. As described previously, because Heathrow is capacity constrained, ticket fares have increased in order to choke off excess demand. To understand the magnitude of this fare increase, we have used empirical evidence from We have found that in 2016, ticket fares at Heathrow were on average 23.3% higher than at other London airports and 24.4% higher than at other European hub airports, despite controlling for other factors that affect fares. This translates to a mark-up in one-way ticket fares of approximately 59. Furthermore, we did not find a mark-up on ticket fares from Gatwick in comparison to the other London airports. The full set of results for Heathrow is presented in Figure 43. Figure 43 Congestion premium estimates at Heathrow 2016 Sample Main premium estimate Implied one-way mark-up Range of estimates London %*** %*** to 35.7%*** European hubs %*** %*** to 25.8%*** Source: Frontier Economics Note: *** means the result is statistically significant at the 1% level. ** means significant at the 5% level. * means significant at the 10% level. The remainder of this annex sets out the full methodology of the estimation, followed by a discussion of secondary results not reported in Section 3. A.2 Methodology To estimate the cost of the congestion premium at Heathrow, we have used an econometric model with 2016 data. Such an approach allows us to control for various factors that also influence ticket fares and therefore isolate the effect of the congestion premium. In this section, we detail the regression specifications, the interpretation of the specific coefficients, data sources used and the key assumptions for the analysis. A.2.1 Regression specification Our baseline ordinary least squares (OLS) regressions are presented in below in Equation 1 and Equation 2. Equation 1 estimates the price difference between Heathrow and the other London airports, namely Gatwick, Luton, Stansted and City airports. Equation 2 estimates the price difference between Heathrow and other European hubs, namely Paris Charles de Gaulle, Amsterdam-Schiphol, Frankfurt and Madrid airports. frontier economics 53

155 Competition & Choice 2017 Equation 1 London airports regression ln (Fare) i = β 0 + β 1 Distance i + β 2 Long haul i + β 3 ln (Frequency_Own) i + β 4 ln (Frequency_Other) i + β 5 Business i + β 6 VFR i + β 7 Transfer i + β 8 LCC i + β 9 LHR i + u i Equation 2 European hub airports regression ln (Fare) i = β 0 + β 1 Distance i + β 2 Long haul i + β 3 ln (Frequency_Own) i + β 4 ln (Frequency_Other) i + β 7 Transfer i + β 8 LCC i + β 9 LHR i + u i We have selected our baseline regression specifications because they fit best with the data and are consistent with our approach used to estimate the 2012 premium. 29 While there are some explanatory variables included in the regression model that are not statistically significant, they are included to allow a clearer interpretation of the other explanatory variables. For example, the coefficient on business passengers is not significant in some of the regressions. However, we include it to control for the possibility that Heathrow s premium is caused by Heathrow s attractiveness to business passengers. Our specifications employ heteroskedasticity-robust standard errors because the standard errors in our regression models are unlikely identically distributed. The price differences between Heathrow and other London airports depend on the other London airport in question, as shown in the graphs of fares on overlapping routes (Figure 13 to Figure 16). Thus, we use heteroskedasticity-robust standard errors to control for the likely occurrence of heteroskedasticity. Using robust standard errors increases the magnitude of the standard errors, lowering the significance levels in our results and ensuring our results are conservative. We modify our baseline specifications to test various sensitivities. First, to test whether results differ by airport, we repeated the regression individually for each airport. Second, we replaced the Heathrow dummy variable with a Gatwick dummy variable to test whether Gatwick faces a congestion premium. Third, we tested whether the congestion premium varies by short and long haul flights by running the specifications on short haul and long haul flights separately. Finally, we have tested various sensitivities of our baseline model to confirm our results. Finally, there does not exist a perfectly correct and unique model for this estimation as it faces problems such as multicollinearity as described above in Section 3.4. As a result, testing different specifications and comparing the range of estimated premiums is a robust method to ensure conclusions remain valid across different possible specifications. Estimates of other coefficients besides the premium may vary significantly across the regressions, but in all cases, we would expect to observe a congestion premium at Heathrow. A.2.2 Interpretation of coefficients The interpretation of coefficients is described in Figure 44. Because we are interested in the congestion premium at Heathrow, our primary coefficient of 29 Frontier (2014), Impact of airport expansion options on competition and choice. frontier economics 54

156 Competition & Choice 2017 interest is β 9. β 9 tells us how much on average fares at Heathrow are higher or lower than at other airports in our sample. Figure 44 Coefficient interpretations Coefficient Explanatory variable Interpretation β 0 Constant β 1 Distance Holding everything else constant, an increase in distance of one nautical mile will increase the price by β %. 1 β 2 Long haul Holding everything else constant, on average, the fare for long haul flights is β % 2 higher than the fare for short haul flights. β 3 ln(frequency_own) Holding everything else constant, a 1% increase in the number of flights to the same destination at the same airport is associated with a β % 3 increase in fare. β 4 ln(frequency_other) Holding everything else constant, a 1% increase in the number of flights to the same destination at other airports is associated with a β % 4 increase in fare. β 5 Business Holding everything else constant, a one percentage point increase in business passengers on this route is associated with a fare increase of β %. 4 β 6 VFR Holding everything else constant, a one percentage point increase in passengers who visit friends and relatives on this route is associated with a fare increase of β %. 5 β 7 Transfer Holding everything else constant, a one percentage point increase in transfer passengers on this route is associated with a fare increase of β %. 7 β 8 LCC Holding everything else constant, a one percentage point increase in passengers who fly with low cost carriers on this route is associated with a fare increase of β %. 8 β 9 LHR Holding everything else constant, on average, the fare for a flight on this route from Heathrow is β % 9 more expensive than the same flight from the other airports in the sample. Source: Frontier Economics. frontier economics 55

157 Competition & Choice 2017 A.2.3 Data sources In order to construct the variables for our regression analysis, we have relied on a range of different data sources. A variable-by-variable summary is presented in Figure 45. Note that all variables are defined as departure airport-arrival airport combinations. For example, the observation Heathrow-Peking would be included in the data set but the observation Peking-Heathrow would not be included. In selecting our data sources, we have aimed to ensure consistency between our 2012 analysis and our updated analysis in In all but one case, we have used the same data source for defining the explanatory variables. The one exception to this is the definition of the LCC (low cost carrier) explanatory variable. Previously in 2012, we used the SRS analyser definition of low cost carriers to determine what percentage of passengers from the IATA data travelled on these low cost carriers. However, low cost carriers have changed significantly since 2012, both in terms of new low cost carriers entering the market to airlines switching from mainline to low cost carriers, or vice versa. As a result, we have used the OAG Schedules Analyser for new up-to-date categorisation of carriers by mainline or low cost and have then applied these categorisations to IATA passenger data to determine the percentage of low cost carriers on a given route. Furthermore, we have constructed data sets for two samples of observations, London airports and European hub airports, corresponding to Equation 1 and Equation 2 above. In the London airport sample, we have included all routes departing from the following airports: Heathrow, Gatwick, Luton, Stansted and City. Similarly, for the European hub scenario, we have included all routes departing from the following airports: Heathrow, Paris Charles de Gaulle, Amsterdam- Schiphol, Frankfurt and Madrid. frontier economics 56

158 Competition & Choice 2017 Figure 45 Data sources by explanatory variable Variable Description Source Fare Distance Long haul Frequency_Own Frequency_Other Business VFR Transfer LCC Airport dummy variables (e.g. LHR, LGW, LTN, etc.) Source: Frontier Economics. Average fare for a route from a departure airport. Calculated as Fare = (Total revenue) / (Total estimated passengers) Excludes passenger-related airport charges Distance in nautical miles between departure airport and arrival airport. Dummy variable equal to 1 if route is long haul or greater than 2200nm. Number of annual flights on the route at the same airport. Number of annual flights on the route at the other airports in the sample. Percentage of O/D passengers on the route whose purpose is business. Percentage of O/D passengers on a route whose purpose is visiting friends and relatives. Percentage of passengers on the route who are transfer passengers. Calculated as the number of transfer passengers/ the sum of OD, transfer and beyond passengers. Percentage of passengers on the route on flights operated by low cost carriers. The inclusion of this variable helps capture that LHR has more premium passengers than other London airports. Dummy variable equal to 1 if the departure airport is the airport of the dummy variable. IATA Fare Data IATA Lookup Table IATA Lookup Table OAG Schedules Analyser OAG Schedules Analyser CAA Passenger Surveys CAA Passenger Surveys IATA Fare Data IATA Fare Data and OAG Schedules Analyser frontier economics 57

159 Competition & Choice 2017 A.2.4 Assumptions In the process of constructing the data sets for analysis, we have relied on a variety of assumptions. We detail each of the assumptions in the following discussion. Inclusion of observations We have made three primary assumptions regarding the inclusion of observations. First, as mentioned previously, our analysis uses only flights departing from the airports of interest. That is, we do not include inbound flights to the airports in our sample. This approach assumes that inbound flights are comparable to outbound flights. Second, we have considered only origin-destination (O/D) passengers. The IATA data includes the following four types of passengers: Incoming passengers Outgoing O/D passengers Outgoing Beyond passengers Outgoing Transfer passengers Incoming passengers are passengers whose journey terminates once they arrive at the particular airport of interest. O/D Passengers depart from the airport of interest and travel directly to their final destination. Beyond passengers depart from the airport of interest and travel indirectly to their final destination. Transfer passengers are those passengers who depart from a different airport and travel through the airport of interest on their way to their destinations. These definitions are summarised in Figure 46. Figure 46 Summary of passenger types Source: Frontier Economics. The IATA data provides revenues for the total journey and does not break this down for different flight segments. To include beyond or transfer passengers, additional assumptions would be required on how revenues are allocated across different flight segments of the journey. As these assumptions would be tenuous frontier economics 58

160 Competition & Choice 2017 at best, we have avoided these assumptions and have instead considered only OD passengers for which we have actual revenue estimates. Third, we only included routes which had more than 10,000 passengers. This is equivalent to 3 long haul flights or 6 short haul flights per month. 30 This cut-off point was chosen in order to exclude chartered and irregular flights from the analysis to prevent the model from picking up effects due to outliers in the data. For example, in 2016, 2476 passengers flew from Heathrow to Lambert Airport in St. Louis, United States. This is equal to just under 10 flights per year, which cannot be considered a regular connection. Therefore we exclude it from our analysis. A full breakdown of the number of observations in our sample as well as number of observations excluded is presented in Figure 47. Figure 47 Sample size and excluded observations Sample Final sample size Excluded observations London airports European hub airports Source: Frontier Economics. Trip purpose As the passenger surveys are only conducted in the UK, we were not able to control for trip purpose in the analysis of the European hub airports. For the London airports, we assumed a threefold distinction between different trip purposes: Business Visiting friends and relatives Leisure This does not correspond to the trip purpose definition in the CAA Passenger survey. Purpose in the CAA survey divides passengers between Business and Leisure. We have used the Business passengers from this category and then further divided Leisure into Visiting friends and relatives and Leisure using the information provided in the Main Purpose description. 31 By including the trip purpose variable, we can control for the effect on ticket prices resulting from the fact that Heathrow serves more premium or business passengers compared to other London airports. A.2.5 Estimating the premium in 2030 We can also forecast the congestion premium in 2030 if Heathrow was not expanded. We calculate the cost of the constraint from the excess demand by using the definition of the price elasticity of demand, which is: 30 This calculation assumes that the average capacity of a short-haul airplane is 120 passengers and the average capacity of long-haul airplane is 250 passengers. This also assumes that airplanes fly 365 days a year. 31 Note that we do not include all three categories of trip purpose in our regression specification in order to avoid perfect collinearity among the regressors. That is, if all three were included their sum would equal to one, and therefore, the model would be unable to estimate all three coefficients. While we omit the leisure category, it is statistically equivalent to omit any of the three. frontier economics 59

161 Competition & Choice 2017 Price elasticity of demand = Percentage change in demand Percentage change in fares The price elasticity of demand for flights is defined as the percentage change in demand resulting from a 1% change in fares. This elasticity is negative as demand will decrease if prices go up. Rearranging this equation gives us: Percentage change in fares = Percentage change in demand Price elasticity of demand The percentage change in demand is estimated as the difference in the 2030 pasenger figures between the 2 runways and 3 runways scenarios while the price elasticity of demand is defined as in the catalytic impact analysis to be A.3 Discussion of other results The following section discusses our results related to other variables and not the estimated congestion premiums, which are discussed in Section 3. The full set of regression estimates is shown in Figure 50 to Figure 53. Note that while the specific estimates on the various coefficients may vary across the specifications, this is not a worry due to the reasons described in Section A.2.1. A.3.1 Impact of other variables Long haul and distance As can be seen in Figure 50 and Figure 51, the coefficient on distance is positive and significant in every case. This results matches expectations as distance is a key determinant of flight costs. The coefficient on the long haul dummy variable is positive and significant for all but one regression, which means that holding everything else constant, long haul flights are 27% more expensive according to the results in Figure 50. This is an interesting result as we have already controlled for the extra distance that is covered during the flight. This could, perhaps, be interpreted as reflecting the additional operational differences between long haul and short haul flights, including larger aircraft and over-night stops meaning longer turnaround times. It is also interesting to note that the premiums for long haul flights are different at Heathrow than at Gatwick. Whereas at Heathrow, holding everything else constant, long haul flights are more expensive than short haul flights, at Gatwick the coefficient on long haul flights is not statistically different from zero. It is possible that this reflects a competitive effect, resulting from the capacity constraint at Heathrow. That is, the impact of capacity constraints on competition and ticket prices is particularly marked for long haul at Heathrow, because these are the routes on which additional competitive entry is not possible and passengers have no viable alternative option at other airports. To investigate the fare pricing based on distance at Heathrow and Gatwick further, we investigated the relationship between distance and fares at both airports in Figure 48 shows a scatterplot of the average fares and distance for the different destinations for all London airports in Figure 49 shows a scatterplot of the log fares of the different destinations of short haul and long haul destinations frontier economics 60

162 Competition & Choice 2017 at Heathrow and Gatwick. From the scatterplots it is clear that Heathrow has higher fares than Gatwick for both short and long haul destinations, although Heathrow has more destinations with a longer distance than Gatwick does. We also observe in Figure 49 that there is seemingly a break between short and long haul flights in terms of the relationship between fares and distance. This break, however, is much more pronounced at Heathrow than Gatwick, which could explain why the long haul dummy variable is not significant for Gatwick while it is for Heathrow. Figure 48 Distance and average fares at London airports in 2016 Source: Frontier Economics and IATA. frontier economics 61

163 Competition & Choice 2017 Figure 49 Distance and log fares at London airports in 2016 Source: Frontier Economics and IATA. Frequencies We had expected the coefficients on frequencies to be negative, as a greater supply of flights might be expected to bring down prices. Nevertheless, it could be the case that increased frequency of flights represents the higher demand for a flight, as airlines supply more flights if a particular route turns out to be profitable. In fact, our results show mixed effects for both frequency of flights at the same airport and frequency of flights at other airports. In some cases the results are not statistically different from zero, while in other cases the results are either positive or negative and statistically different from zero. For example, for the main London airport regressions, own frequency is positive and statistically significant suggesting that holding everything else constant, more flights to the same destination from the airport in question is associated with higher fares on that particular route. This could be consistent with higher frequencies being associated with higher demand and therefore increased fares. Trip purpose Trip purpose proves to be a significant determinant of fares in most regressions. Business has a positive and in many specifications statistically significant effect. For example, at the London airports in 2016 for short haul flights, holding everything else constant, a 1 percentage point increase in passengers with the trip purpose of business is associated with a 0.64% increase in average fares. Moreover, more passengers visiting friends and relatives are associated with lower fares. This is also a significant result that is robust across many airports and frontier economics 62

164 Competition & Choice 2017 sample and model specifications. This suggests VFR passengers may be the most price sensitive passenger group. Transfer passengers The coefficient on transfer passengers is generally positive and significant. For example, at the London airports in 2016 across all flights, holding everything else constant, a 1 percentage point increase in transfer passengers on a particular route is associated with a 0.41% increase in average OD fares. This could be consistent with transfer passengers being more price sensitive, and so the market allocating a smaller share of fixed (e.g. aircraft) costs to this group. Low cost carrier passengers The coefficient on low cost carrier passengers is negative and significant. This is a result we would expect. frontier economics 63

165 Competition & Choice 2017 Figure 50 Regression results London airports 2016 Haul All All All All All All LH SH All LH SH Airports LHR LGW LTN STN LCY All All All All All All Dependent Variable Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Distance *** *** *** *** ** *** 8.01e-05** *** *** 7.86e-05** *** Long haul 0.781*** *** 0.269** 0.247** Log Frequency own 0.106*** *** * 0.114** *** 0.113** Log Frequency other *** ** ** *** ** Business *** * 0.634*** * 0.634*** VFR *** * ** *** * *** *** ** * Transfer 0.401** ** 0.657*** *** 0.643*** 0.537*** LCC *** * *** ** *** *** ** *** LHR 0.233*** *** LGW Constant 4.536*** 4.430*** 3.784*** 4.168*** 3.890*** 4.356*** 5.031*** 4.177*** 4.351*** 5.156*** 4.180*** Observations Adj. R-squared Source: Frontier Economics. Note: *** means the result is statistically significant at the 1% level. ** means significant at the 5% level. * means significant at the 10% level. frontier economics 64

166 Competition & Choice 2017 Figure 51 Regression results European hub airports 2016 Haul All All All All All All LH SH Airports LHR AMS CDG FRA MAD All All All Dependent Variable Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Distance *** *** *** *** *** *** 4.51e-05** *** Long haul 0.735*** 0.519*** 0.865*** 0.758*** 0.621*** 0.760*** Log Frequency own Log Frequency other * * *** * * ** Transfer 0.486*** 0.577*** 0.783*** 0.488*** *** 0.532*** 0.594*** LCC ** * *** *** *** LHR 0.245*** 0.188*** 0.228*** Constant 4.175*** 4.625*** 4.368*** 4.131*** 5.038*** 4.407*** 4.912*** 4.196*** Observations , Adj. R-squared Source: Frontier Economics. Note: *** means the result is statistically significant at the 1% level. ** means significant at the 5% level. * means significant at the 10% level. frontier economics 65

167 Competition & Choice 2017 Figure 52 Robustness regression results London 2016 Haul All All All All All SH SH SH SH SH LH LH LH LH LH Airport All All All All Overlaps All All All All Overlaps All All All All Overlaps Dependent variable Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Distance *** *** *** *** *** *** *** *** *** *** 8.01e- 05** 8.97e- 05** *** *** *** Long haul 0.269** 0.288*** 0.441*** 0.474*** Log Frequency own Log Frequency other * ** ** 0.119** *** ** ** * ** ** Business ** 0.210* 0.282** 0.581*** 0.634*** 0.622*** 0.653*** 0.637*** 0.733*** 1.152* 1.517** 1.315** 1.701** 3.181*** VFR *** *** *** *** *** *** *** *** *** *** * ** ** ** Transfer 0.411** 0.468*** *** 0.634*** LCC *** *** *** *** *** *** *** *** *** *** ** * *** ** ** LHR 0.233*** 0.326*** 0.250*** 0.357*** 0.270*** 0.283*** 0.241*** 0.288*** 0.239*** 0.270*** ** 0.405*** Constant 4.356*** 4.338*** 4.590*** 4.586*** 4.484*** 4.177*** 4.176*** 4.235*** 4.231*** 4.397*** 5.031*** 4.995*** 5.458*** 5.484*** 5.027*** Observations Adj. R- squared Source: Frontier Economics. Note: *** means the result is statistically significant at the 1% level. ** means significant at the 5% level. * means significant at the 10% level. frontier economics 66

168 Competition & Choice 2017 Figure 53 Robustness regression results European hub airports 2016 Haul All All All All All SH SH SH SH SH LH LH LH LH LH Airport All All All All Overlaps All All All All Overlaps All All All All Overlaps Dependent variable Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Log fare Distance *** *** *** *** *** *** *** *** *** *** 4.51e- 05** 5.88e- 05*** 5.38e- 05*** 6.31e- 05*** 6.17e- 05*** Long haul 0.760*** 0.783*** 0.793*** 0.814*** 0.834*** Log Frequency own Log Frequency other *** * *** *** 0.169*** *** *** ** ** *** Transfer 0.487*** 0.435*** 0.400*** 0.594*** 0.490*** 0.564*** 0.532*** 0.620*** 0.436*** LCC *** *** *** *** *** *** *** *** *** *** *** *** LHR 0.245*** 0.150*** 0.258*** 0.175*** 0.252*** 0.228*** 0.124*** 0.218*** 0.127*** 0.233*** 0.188*** *** 0.199*** 0.244*** Constant 4.407*** 4.489*** 4.626*** 4.841*** 4.282*** 4.196*** 4.470*** 4.386*** 4.668*** 4.201*** 4.912*** 4.911*** 5.679*** 5.947*** 4.770*** Observations 1,020 1,020 1,051 1, Adj. R- squared Source: Frontier Economics. Note: *** means the result is statistically significant at the 1% level. ** means significant at the 5% level. * means significant at the 10% level. frontier economics 67

169 Competition & Choice 2017 ANNEX B CATALYTIC IMPACTS This annex provides more detail on our methodology to estimate the catalytic impact and the literature we reviewed to inform our assumptions. It is structured as follows: Overview of key steps in the methodology; Key relationship 1 Air connectivity (i.e. the number of direct routes) and passenger volumes: detailed approach and evidence to underpin assumptions; Key relationship 2 Passenger volumes and FDI, trade and tourism: detailed approach and evidence to underpin assumptions; and Key relationship 3 Tourism, FDI, trade and productivity, GDP and employment: detailed approach and evidence to underpin assumptions B.1 Overview of methodology Our methodology follows the steps illustrated in Figure 54. Our starting point is the additional direct flights that could be added if there was a third runway. For FDI and trade, we undertake the analysis at a country level, rather than a city level, because trade and FDI data is provided at the country-level. For tourism, we carry out the analysis at a city-level. We determine the additional travel time for the indirect connection by considering the additional distance flown and connecting time at the transfer airport. Distance is determined using a great circle route mapping tool. Switching from a direct to an indirect flight leads to a greater percentage increase in travel time for destinations that are closer to Heathrow. For example, adding 3 hours of travel time to a 5 hour journey represents a bigger percentage increase than adding 3 hours of travel time to a 12 hour journey. As a result, the impact of an indirect flight is greater for destinations that are closer. We convert the additional travel time into a monetary value by applying the value of time derived from the Department for Transport s (DfT) analysis of values of time and hourly wage rates. The change in the travel cost is then related to the price of the original ticket to determine the percentage change in the travel cost. Using a price elasticity of demand, we can determine the change in total demand for travel to each destination. We then relate the percentage increase in passengers to a change in trade, FDI and tourism spending by using the elasticities discussed in the sections that follow. Changes in trade, FDI and tourism spending can then be related to the impact on GDP and employment. frontier economics 68

170 Competition & Choice 2017 Figure 54. Overview of the three key relationships in calculating the employment facilitated by having a third runway We use data on FDI flows by partner country (both inward and outward FDI) for the UK from the OECD. Data on exports and imports between the UK and the rest of the world is available from the HMRC. We used ONS data published in Overseas Travel and Tourism releases on tourist spending and purpose of visit in order to estimate the impact on tourism. B.2 Key relationship 1: Air connectivity and passenger volumes Additional direct connections imply that passengers will save time spent travelling by choosing to fly direct rather than indirect. By monetising the travel time saved, we can estimate the change in demand for direct travel, and hence the number of additional passengers that will fly direct. This then enables us to estimate their impact on trade, FDI and tourism. The methodology behind monetising the travel time and estimating the increase in direct passengers is outlined in the formula below: ((Additional travel time * Value of time)/ Ticket price) * Travel cost elasticity of demand = Change in number of passengers frontier economics 69

171 Competition & Choice 2017 The change in travel time is calculated on the basis of additional travel distance multiplied with average speed. We distinguish speed for take-off and landing from the speed during the flight and use the following assumptions: average speed during flight: 500 mph; and average speed for take-off and landing: 250mph. Distance is calculated on the basis of great circle routes. We add additional connecting time at the airport. Our results are based on an assumption of an average of 1 hour of connecting time for a short-haul flight and an additional 3 hours on average of connecting time for a long-haul flight. This implies that passengers would need 1-3 hours between landing and take-off for their connecting flights. We consider this assumption to be conservative, as this is likely to be close to the minimum rather than the average connecting time. The total additional connecting time is therefore equal to the additional flight time plus the connecting time. Our results show that the additional travel time varies from 1.1 hours to 3.5 hours. We monetise the value of time by using hourly wage rates from the ONS and the DfT s estimates of values of time. For business travellers our value of time is 53 which is informed by the DfT s estimate of Value of Working time per person for a rail passenger (Tag Unit 3.5.6, Values of Time and Vehicle Operating Costs, October 2012) of 50, inflated to 2016 using UK GDP growth forecasts. We estimate that the value of working time of an air passenger would be as much, if not more, than a rail passenger. While recent estimates suggest a working time for a rail passenger closer to 30, this is likely to be based on increased use of mobile internet access. As this does not generally apply to air travel (even though wifi is available on some flights), we use the rail passenger value of time of 50. For nonbusiness travel, we use the hourly wage rate to estimate the value of time saved by travelling direct. This is based on the ONS estimate of 16 for mean hourly earnings from their analysis of Patterns of Pay 32. We adjust wage rates for other countries using Purchasing Power Parity. Ticket prices are based on IATA data. We reviewed a number of studies on the price elasticity of demand. The most disaggregated values are available from IATA (2007). We have used these to estimate a travel cost elasticity of B.3 Key relationship 2: Passenger volumes and FDI, trade and tourism In this section, we describe the link between passenger volumes and FDI, trade and tourism as follows: Relationship between face-to-face meetings and trade and FDI Relationship between leisure passengers and tourist spending 32 Patterns of Pay: Estimates from the Annual Survey of Hours and Earnings, UK, 1997 to 2013, 27 February 2014, ONS frontier economics 70

172 Competition & Choice 2017 B.3.1 Relationship between face-to-face meetings and trade and FDI Our analysis requires us to make an assumption on the relationship between faceto-face meetings, trade and FDI. Face-to-face meetings increase the likelihood of closing business deals which has a positive impact on trade and FDI. Face-to-face meetings are also important to manage increasingly globalized supply chains. This relationship is supported by qualitative literature, but it is difficult to quantify the relationship. B.3.2 Concept Despite the rise of technologies such as videoconferencing, face-to-face meetings still play an important role in developing and maintaining successful business relationships. Most relationships are built on trust between business partners and face-to-face meetings are still the most effective way to build and establish trust. In addition, in-person meetings can be used to inspect production sites and meet larger teams which cannot be done through videoconferencing. This is because face-to-face meetings play role in overcoming trade and FDI barriers between economies. The most common barriers include: Product market regulation a range of different types of regulation (product standards, safety regulation, etc.) can inhibit trade and FDI across borders; Tariffs and quotas, local content requirements formal trade barriers such as tariffs also reduce the likelihood of trade; Exchange rate the risk of changes in the exchange rate can pose a significant barrier to trade and FDI, as exchange rate volatility can increase the spread of potential returns; and Cultural differences language differences and different business cultures can impede business relationships across cultures as it is more difficult to build trust. Business travel can reduce or overcome some of these barriers, as face-to-face meetings enable a better understanding of local product market regulation and formal trade barriers. Face-to-face meetings are also one of the key ways to build trust across cultures. Figure 55 illustrates this concept. frontier economics 71

173 Competition & Choice 2017 Figure 55. Illustration of differences in trade barriers These barriers are much lower when considering trade and FDI between the UK and Europe compared to other international transactions. This is because cultural differences are much smaller (for example, common language), and the trade links between the UK and Europe are well-established. Therefore, face-to-face meetings to build mutual trust and understanding are likely to have a smaller effect. For this reason, we assume that additional direct travel to and from Europe has no impact on trade and FDI. B.3.3 Review of evidence There is a range of qualitative, survey-based evidence that suggests face-to-face meetings play an important role in business relationships. We discuss these below. The importance of in-person meetings for trade facilitation is also supported by the existence of trade missions. For example, UK Trade and Investment (UKTI) helps UK-based businesses in establishing links with overseas partners. Among other events, they organise trade missions for different sectors/industries involving workshops, fairs, speakers, etc. which facilitate networking and business opportunities. The World Travel and Tourism Council (2012) finds that sales conversion rates with an in-person meeting are 50 per cent, compared to conversion rates of 31 per cent without an in-person meeting. The results are based on surveys in Brazil, China, Germany, the UK and the USA and are consistent across these countries. In 2011, the WTTC conducted another survey on the importance of business travel and found that 28 per cent of existing business could be lost without face-to-face meetings and sales conversion rates are estimated to be per cent higher with face-to-face meetings. This is further supported by a range of qualitative studies. Frankel (1997) illustrates the importance of face-to-face meetings as follows: Consider a kind of export important to the United States: high-tech capital goods. To begin sales in a foreign country may involve many trips by engineers, frontier economics 72

174 Competition & Choice 2017 marketing people, higher ranking executives to clinch a deal, and technical support staff to help install the equipment or to service it when it malfunctions. A survey by the UK Institute of Directors (2008) asked about the impact on businesses if the amount of business travel by air was significantly curtailed. 30 per cent of respondents said that there would be significant adverse effects while 44 per cent indicated small adverse effects. Poole (2010) finds that business travel to the United States by non-resident, non-citizens has a positive impact on export margins. This report has also been cited by the Airports Commission. Aradhyula & Tronstad (2003) find that their results support the hypothesis that both formal business exploration and casual exposure to cross-border business opportunities have a positive impact on trade. Strauss-Kahn & Vives (2005) find that headquarters relocate to metropolitan areas with good airport facilities, low corporate taxes, low average wages, high levels of business services, and an agglomeration of headquarters in the same sector of activity. The effects are quantitatively significant (for airport facilities in particular). The City of London (2008) surveyed finance and insurance companies on the importance of air travel. They found that 69 per cent of firms consider air travel to be critical for business travel by their staff, with only 2 per cent viewing it as not important. Boeh & Beamish (2012) demonstrate that travel time between different locations has a significant predictive power in firm governance and location decisions, as travel time could otherwise be employed for productive purposes. Napier University (2004) finds that [ ] air transport per se is not a necessary condition, but what is important are: the extent to which that area is plugged directly into other major international hubs - availability and efficiency of routes (direct, hubbed); costs and the level of competition in global transport market, and; perceived and actual interchange efficiencies. This is a key consideration in the level of foreign investment into an area and is most important for firms with international trading or contacts such as, high-tech firms, financial services and pharmaceutical firms. Survey-based evidence also suggests that the importance of face-to-face meetings depends on differences between business partners. Evidence from the World Travel and Tourism Council (WTTC) and the Harvard Business Review indicates that international business travel plays a more improtant role in generating and sustaining business than domestic travel. The WTTC (2012) found that: One extra dollar invested in international business travel would generate on average US$17 in trade; and One extra dollar invested in domestic US business travel by companies results in an increase in revenue of US$9.50. This implies that the return on investment for international travel is roughly half of domestic travel. Figure 56 illustrates the difference in the return on investment. frontier economics 73

175 Competition & Choice 2017 Figure 56. Return on investment Source: World Travel and Tourism Council, 2011 Similarly the Harvard Business Review (2009) confirms the role of face-to-face meetings in facilitating and sustaining business deals and also provides some evidence for the specific role of business travel to overcome barriers to trade across different cultures. For example, it found that: 93 per cent of survey respondents agreed that in-person meetings are helpful in negotiating with people from different language and cultural backgrounds; One survey respondent said that Communicating with our Chinese partners is enough of a challenge without face-to-face, because it is very difficult to explain a difference in perspective without body language ; and A number of respondents described the need to work with clients in their own environment to get a full picture of the challenges and opportunities they face. There is a small amount of literature that supports this view. Cristea (2011) found robust evidence that the demand for business-class air travel is directly related to volume and composition of exports in differentiated products. The paper finds that trade in R&D intensive manufactures and goods facing contractual frictions is most dependent on face-to-face meetings. Contractual frictions are more likely to occur with higher trade barriers so this would support a conservative assumption of an elasticity of zero for trade between the UK and Europe compared to the rest of the world. Poole (2010) finds that business travel for the purpose of communication acts as an input to international trade. The effect is stronger for differentiated products and for higher-skilled travellers, reflecting the information intensive nature of differentiated products. The effect is driven by travel from non-english speaking countries, for which communication with the U.S. by other means may be less effective. The findings therefore also confirm our view that business travel plays a bigger role when connecting firms from different cultural backgrounds. frontier economics 74

176 Competition & Choice 2017 B.3.4 Selection of assumption values Quantitative evidence on the relationship between face-to-face meetings and trade/fdi is difficult to obtain. This is because it is difficult to pick out the impact of face-to-face meetings from the other factors that influence trade and FDI. The World Travel and Tourism Council (WTTC) performed an econometric analysis on the relationship between flights and trade/fdi for a range of countries as shown in Figure 57. The figure shows the correlation coefficient as well as the results of the Granger test for causality. The figure shows that the correlations vary between 0.17 for outbound business travel from Italy to 0.98 for outbound business travel from Brazil. Figure 57. Trade and business travel by country Source: WTTC, 2012 We acknowledge that it is difficult to select an appropriate estimate for the relationship between trade and business travel. We have considered a range of evidence as illustrated in Figure 58 and have selected 0.3% as the elasticity. In the context of the available evidence, this is a conservative estimate. frontier economics 75

177 Competition & Choice 2017 Figure 58. Evidence on relationship between face-to-face meetings and trade It is even more difficult to select an appropriate estimate for the relationship between FDI and flights as little research has been done on this topic. For example, a survey of businesses in Munich indicated that 55% of foreign businesses would not be located in the region around the airport if air connectivity was not satisfactory. Regressions of inbound passengers and inward FDI for different country/airport combinations suggest that the elasticity may be as high as As these regressions suffer from omitted variable bias and endogeneity issues, we consider this an upper bound only. In order to select a conservative estimate, we have selected 0.3 as the elasticity of business travel to FDI. B.3.5 Relationship between leisure passengers and tourist spending The additional direct connections and travel time savings imply more tourist visits to the UK as well as more UK tourists abroad. In order to estimate the impact of connectivity on tourism spending we have obtained data on spending by purpose of visit from the ONS Overseas Travel and Tourism Quarterly Release. We estimate the average spend per passenger (for overseas visitors to the UK and for UK citizens abroad), and then multiply these values by our tourist passenger increase following expansion. This provides an estimate of the value of inbound and outbound tourism spending facilitated by expansion. The net impact is obtained by subtracting outbound spending from inbound spending, and this feeds straight into the GDP for the year under consideration. frontier economics 76

178 Competition & Choice 2017 B.4 Key relationship 4: Tourism, FDI, trade and productivity, GDP and employment We break this section into separate relationships: Trade, productivity and GDP; FDI, productivity and GDP; GDP and employment B.4.1 Trade, productivity and GDP A large body of academic research investigates the positive impact of trade on productivity at the firm level. At the economy-wide level, there are also some studies which suggest additional trade leads to higher productivity. The key mechanisms by which trade influences productivity can be characterized in three ways: Innovation trade is one of the key transmitters of innovation as it exposes companies to a wider range of products and processes in other countries. This applies regardless of whether the partner country is a developed or developing economy. Competition as trade increases the market size companies that export or import are faced with more intense competition. Competition puts pressure on companies to be more efficient. This applies to trade with any partner country. Economies of scale larger market sizes imply that production processes can benefit from economies of scale. This also applies to trade any partner country. For example, the OECD (2012) found that: A main channel through which trade increases income is productivity growth. Importing creates competition that forces domestic firms to become more efficient and provides access to inputs of international calibre; exporting creates incentives for firms to invest in the most modern technologies, scales of production and worker training. The combined effect is to spawn a process of continual resource reallocation, shifting capital and labour into activities with higher productivity. Importantly, the impact of trade on productivity holds for both exports and imports. This is because we are considering the long-term impact on trade on productivity instead of the short-term. In the short-term import substitution can lead to structural changes in the economy that require some adjustments. However, once resources are allocated to more productive uses, imports have a long-term positive impact on productivity. The study that underpins our main assumption uses a measure of real openness which is the sum of exports and imports over GDP. The OECD has undertaken a study with data from 21 high-income countries over nearly 30 years controlling for other factors: every 10-percentage point increase in trade exposure (as measured by trade share of GDP) contributes a 4-percent increase in GDP per capita. Similarly, in 2007 the European Commission stated that For instance, empirical analysis indicates that, on average, a 1% increase in the openness of the economy, as measured by the ratio of imports to value added, results in an increase of 0.6% in labour productivity in the following year. To select frontier economics 77

179 Competition & Choice 2017 a conservative assumption, we have used the lower figure of 0.4 as indicated by the OECD research. B.4.2 FDI, productivity and GDP Both inward and outward FDI have a positive impact on productivity and competitiveness. Our research suggests that access to new markets, cheaper inputs and new technology or know-how boosts the scale and efficiency of domestic production. The underlying theory is similar to that applied to free trade agreements. Figure 59 summarizes how FDI can impact on productivity. Figure 59. Impact of FDI on productivity Evidence on the specific impact of FDI on productivity is limited. We have found the following studies: DIW (2009) studies the relationship between outward FDI and economic growth. They find that FDI enables firms to enter new markets, import intermediate goods from foreign affiliates at lower costs and access foreign technology. As a result the domestic economy benefits from outward FDI due to increased competitiveness of the investing companies and associated productivity spill-over to local firms. The analysis shows that for every 1 per cent increase in outward FDI stock, local GDP increases by 0.19 per cent. Korea Institute for International Economic Policy (2008) studies the relationship of inward FDI and productivity using Ireland as a case study. They find that FDI advances new foreign technology or import of new intermediary goods and enhances growth by accumulation of human capital by means of labour training or absorption of technology and new management techniques. Their analysis shows that for a 1 per cent increase in inward FDI stock, local GDP increases by 0.24 per cent. Based on the quantitative analysis we reviewed, we make the following assumptions: frontier economics 78

180 Competition & Choice 2017 a 1% increase in inward FDI increases productivity and thus, GDP by 0.24 %; and a 1% increase in outward FDI increases productivity and thus, GDP by 0.19%. B.4.3 GDP and employment The relationships between trade, FDI and GDP give us a percentage change in GDP resulting from the change in trade and FDI. To estimate the value of this impact in money terms, we use GDP forecasts for the UK based on inputs from the IMF and HSBC. frontier economics 79

181 Competition & Choice 2017 frontier economics 80

182 Competition & Choice frontier economics 81

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