No Hard Analysis. A critique by HACAN of the recently-published

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1 No Hard Analysis A critique by HACAN of the recently-published report, Aviation Services and the City, the City of London commissioned from York Aviation consultants about the aviation needs of the City. Summary of the Critique Whenever I sit down to read and analyse economic reports I fear I ll need to spend many hours pouring over lengthy tables, statistics and analysis. Not this time! The most notable feature of this report is its absence of hard analysis to back up its conclusions. 1. The report favours expansion a third runway at Heathrow, growth at City Airport, a new runway at either Stansted or Gatwick and the introduction of mixed-mode at Heathrow but produces no detailed calculations to back this up. 2. It contains a lot of information about the flying habits of business in the City of London and surrounding areas, but information about travel patterns does not in itself add up to a case for expansion. 3. It ducks the key questions facing decision-makers: what will future demand patterns look like? Will City businesses and the wider economy be harmed if no further expansion takes place at Heathrow and City airports and no new runways are built at Stansted and Gatwick? 4. It does tell us that the City of London has become the world s pre-eminent financial centre, but fails to acknowledge that it has done so despite Heathrow having less runway capacity than Charles De Gaulle, Frankfurt or Amsterdam! It fails therefore to acknowledge, far less counter, the argument made by CE Delft in its report, The economics of Heathrow expansion, that Heathrow expansion is not essential for the London economy because it is outweighed by the other factors that make London an attractive place for business. 5. There is no recognition that London is already the best-connected city in the world. In 2009, the last year for which full figures are available, over 130 million passengers used London s five airports (Heathrow, Gatwick, Stansted, Luton and City). That is more than any other world city. Of London s closest European competitors, just under 86 million passengers used Paris s airports, with almost 51 million using Frankfurt, 48 million Madrid and 43 million Amsterdam. 6. It is muddled about whether business will suffer if Heathrow does not grow as a hub airport. It makes the obvious point that a bigger hub airport will enable the airlines to provide more flights to more destinations if the business case exists. But it produces no hard evidence on whether London s economy will suffer if Heathrow does not grow. The CE Delft report was clear: it was not critical to the London economy that Heathrow became a bigger hub because so many businesses (and tourists) came to London as a destination. The York Aviation report produces no hard evidence to refute that. Indeed, it appears in places to agree with CE Delft. Self evidently companies in the City are based in London and consequently their requirement of Heathrow is to provide a starting point or end point for journeys. The airport s ability to move passengers between two different points (domestic or international) via Heathrow would seem to be of limited concern, particularly if, as has been argued, the strength of demand from London and the South East is strong enough to support the viability of any likely route required. 7. It makes no assessment of the impact on the economy of the increased financial costs of noise, emissions and air pollution if expansion takes place at London s airports. 8. It says very little about high-speed rail. Again, it produces no real analysis. We conclude that this lack of analysis fatally undermines the report s credibility. It does, though, make it easy to read. Perhaps that is the real point of it. It is part of a public relations campaign for expansion rather than a serious attempt at making the economic case for it.

2 What the report calls for The York Aviation report, Aviation Services and the City, received a lot of publicity when it was published at the end of January (1). It calls for a third runway at Heathrow and the expansion of City Airport, favours a new runway at either Stansted or Gatwick and the introduction of mixed-mode at Heathrow. Essentially, it wants to reverse the Government s decision to rule out new runways in the South East and to return to the old policies outlined in the 2003 Air Transport White Paper. What the report does tell us Heathrow is the most important of London s airports for City of London businesses. The importance of Heathrow is down to the fact that it provides much more connectivity to the rest of the world than the other airports: fundamentally, the City requires breadth (range of destinations), depth (high frequencies) and concentration (on a single airport as far as possible) of connectivity. City Airport is seen as an important niche provider of domestic and European connectivity to the City of London. Gatwick and Stansted are not heavily used by City users and consequently are not seen as a priority [for expansion] other than their ability to provide alternates for more focused leisure services. An off-shore airport is regarded as unrealistic and on the wrong side of London. The top 10 individual destinations from the City in 2008 were: Edinburgh; Glasgow; Amsterdam; Zurich; Dublin; Frankfurt; New York JFK; Madrid; Geneva; Munich. The top 10 destinations from the City and the wider area surrounding it were largely the same. The only differences were Stockholm and Copenhagen replaced Munich and Madrid.

3 The report says that future demand is hard to predict because many companies are cutting back on unnecessary travel to cut costs and because of the growth in communications technologies, such as teleconferencing, to do business. The report says: what this means ultimately for the total quantum of demand for air travel in the longer term is hard to predict. But it nevertheless maintains that a third runway at Heathrow and expansion at City, Stansted and Gatwick airports are needed. This illustrates a key flaw in the report. Its call for expansion is not backed up by hard evidence about future demand. In most reports there are detailed calculations to support the case being made. They are often tedious to wade through but they are essential to give any report credibility. They are just not in this report. The information in the report about travel patterns does not in itself add up to a case for expansion. What the report does not tell us 1. There is no analysis of the impact on either the City of London or the wider economy if expansion does not go ahead. No calculations. Nothing. The report does express concern that, if the other European airports catch up with Heathrow, businesses might locate or relocate away from London but no assessment is made of the likelihood of this happening. The report makes no attempt to counter the argument made by CE Delft in its 2008 report, The economics of Heathrow expansion, that Heathrow expansion was not essential for the health of the London economy because it was outweighed by the other factors that made London such an attractive place for business (2). The report acknowledges (unwittingly) that London has become a pre-eminent business and financial centre despite Heathrow having less runway capacity than Charles De Gaulle, Frankfurt or Amsterdam: The City is the world s pre-eminent financial centre. London is and has been for some time the leading world city in the Global Financial Centres Index produced by Z/YEN7; There were 241 branches and subsidiaries of foreign banks in London in March 2010, more than in any other centre worldwide. A third of these banks were from the euro area. Foreign banks manage over one half of UK banking sector assets, totalling over 7,600 billion at the end of 2009, mainly on behalf of foreign customers; The UK insurance industry is the largest in Europe and third largest in the world with net premium income of 200 billion in London is the world's largest international insurance market, with gross premium income of 24.5 billion in It is the main skill centre for world reinsurance. The UK is the global market leader in marine insurance with a 21% market share in 2009; The London foreign exchange market is the largest in the world, with average daily turnover of around $1.8 trillion in April This represented 37% of global turnover, more than New York and Tokyo combined; Nearly one third, 1,400 billion, of the 4,100 billion assets managed in the UK are managed on behalf of overseas clients; London is Europe's leading centre for hedge funds. At the end of 2009, four-fifths of European-based hedge funds' assets were managed out of London. The UK has a 20% share of global hedge fund assets which have been generating substantial returns in 2009 and 2010;

4 The London Stock Exchange has a higher number of foreign listed companies than any other exchange and is one of the leading centres for foreign equity trading; London is the biggest market in the world for derivatives traded over-the counter with 46% of global turnover in April London has become the location of choice for: UK banks and major financial and businesses services companies global headquarters; European banks and financial services companies requiring a foothold in the region s most important financial centre; US, Asian, Middle Eastern and other financial institutions seeking a European headquarters location from which to serve clients within the region. The creation of this financial and business services cluster in London and the concentration of global firms and talent has in turn made London a centre for expertise and innovation, further strengthening the need for travel as specialist services, products and advice housed in London are sold to clients in a wide variety of world regions through a firm s local offices or partners. This picture has been reconfirmed by our consultations. All achieved without a third runway at Heathrow. The point made by CE Delft that the size of Heathrow is not the determining factor in attracting business to London could not have been more clearly made. 2. There is no recognition that London is already the best-connected city in the world. In 2009, the last year for which full figures are available, over 130 million passengers used London s five airports (Heathrow, Gatwick, Stansted, Luton and City). That is more than any other world city. Of London s closest European competitors, just under 86 million passengers used Paris s airports, with almost 51 million using Frankfurt, 48 million Madrid and 43 million Amsterdam. To compare Heathrow with Paris, Frankfurt or Amsterdam is not a like-for-like comparison. The real comparison is between the total capacity there is when all the airports serving the cities are taken into account. These figures show that London remains ahead of the game. 3. There is no clear position whether Heathrow needs to become a bigger hub airport if the economy is not to suffer. The report appears to start off making the argument it is critical to the economy that Heathrow remains a key hub airport (and expansion, and a third runway in particular, is needed for it to do so): One area in relation to Heathrow that is worthy of further consideration is what Heathrow s function as a major hub brings to the City of London economy. At first glance, the answer would appear to be very little. Self evidently companies in the City are based in London and consequently their requirement of Heathrow is to provide a starting point or end point for journeys. The airport s ability to move passengers between two different points (domestic or international) via Heathrow would seem to be of limited concern, particularly if, as has been argued, the strength of demand from London and the South East is strong enough to support the viability of any likely route required. The reality is, however, that Heathrow s hub status does make a contribution to the City economy but the relationship is subtle and comes back to the particular requirements of City businesses in relation to air connectivity. Simplifying for the purposes of this argument, the City wants high frequencies to its major world destinations, primarily the world s other major financial centres both European and intercontinental, but some functions, particularly within the broader business services firms, also

5 require a breadth of connectivity that means that secondary and emerging centres can be reached directly. The Heathrow hub is key in enabling the airport to meet these specific connectivity needs, particularly in relation to long haul destinations. On the key routes, such as New York, Singapore or Hong Kong, the point to point demand is more than adequate to secure the viability of these routes at a reasonable level of frequency but what the additional demand provided by the transfer traffic at Heathrow does is to support the high levels of frequency that the airport offers to these points which is so important in providing the flexibility and resilience that the City economy requires. In relation to secondary and emerging centres, transfer traffic plays the more traditional role of making these points viable at a reasonable level of frequency. New York is a particularly good example and perhaps the key long haul route for the City. With point to point demand in excess of 2 million passengers a year, the route will always be well served and yet airlines are handling nearly one million additional transfer passengers, significantly increasing the capacity and frequency offered, thereby improving flexibility and resilience for the City. A further factor underpinning the importance of the hub is London s role as the main European gateway for global financial services firms. In these cases, visitors to the London office from the US, Asia or the Far East may then travel on to visit other European centres. On their return journey, they will want to use Heathrow as a hub. Hence, Heathrow s hub role underpins, to some extent, London s role as a financial services hub for Europe. It is not disputed that the extra transfer passengers which a successful hub airport can attract can enable airlines, should they wish, to run more frequent services to a greater range of destinations. What is contentious is the view that the London economy will suffer if a third runway is not built to enhance Heathrow as a hub. Careful reading of the York Aviation report suggests that, for all the support it gives for a third runway, they are not convinced that the economy would be damaged if there was no third runway. Look again at their caveats (my emphasis): And again: And: Self evidently companies in the City are based in London and consequently their requirement of Heathrow is to provide a starting point or end point for journeys. The airport s ability to move passengers between two different points (domestic or international) via Heathrow would seem to be of limited concern, particularly if, as has been argued, the strength of demand from London and the South East is strong enough to support the viability of any likely route required. New York is a particularly good example and perhaps the key long haul route for the City. With point to point demand in excess of 2 million passengers a year, the route will always be well served and yet airlines are handling nearly one million additional transfer passengers, significantly increasing the capacity and frequency offered, thereby improving flexibility and resilience for the City. This relationship between the City economy and the hub brings in to sharp focus the current market dynamic caused by the lack of runway capacity that is damaging Heathrow s ability to function as a hub airport. The lack of available slots has seen a trend in recent years whereby airlines have sought to refocus away from short haul services, which by their nature are less revenue intensive, towards more and more long haul services, particularly focusing on high yielding business routes. The result has been a contraction of Heathrow s route network, particularly to domestic and short haul destinations. From the perspective of the City this could in some ways be said to be a non-issue. The City economy is getting what it wants to some degree, more and more frequency on major intercontinental trunk routes. However, this is a somewhat narrow view of the world and it is important to go back to the basic requirements in the round to consider the issue.

6 This is a heavily-caveated endorsement of the need for Heathrow to become a larger hub. And, once again, no hard statistics in sight. The CE Delft report was clear: it was not critical to the London economy that Heathrow became a bigger hub because so many businesses (and tourists) came to London as a destination. The York Aviation report produces no hard evidence to refute that. 4. The report has not factored in all the costs of aviation to the economy if aviation expanded. It is difficult to know for certain what assumptions have been made because there are no calculations in the report but the economic costs of noise, emissions and air pollution seem to be missing. These are considerable as a more recent CE Delft report found when assessing the costs and benefits to the London economy of night flights at Heathrow (3). It showed that, because of the high costs associated with sleep deprivation (stress, heart attacks, reduced productivity at work), a ban on flights before 6am was likely to have overall economic benefits. This sort of economic analysis is completely missing from the City of London report. 5. The report makes no real assessment of the potential of rail It estimates that the development of a significant High Speed Rail network would be a reduction of around 7% to 9% (in demand). But no assessment is made of what sort of modal shift might occur if this was accompanied by significantly lower rail fares and higher air fares. This should really have been done as most of the top 10 destinations are places where modal shift from air to rail could become a distinct possibility. Conclusion We conclude that a lack of analysis fatally undermines the report s credibility. It does, though, make it easy to read. Perhaps that is the real point of it. It is part of a public relations campaign for expansion rather than a serious attempt to maker the economic case for it. References: (1). Aviation Services and the City, York Aviation, commissioned by the City of London Corporation, (2). The economics of Heathrow expansion, CE Delft, commissioned by HACAN, (3). A Ban on Night Flights at Heathrow, CE Delft, commissioned by HACAN, This critique has been written by John Stewart, the Chair of HACAN, the organisation which represents residents under the Heathrow flight paths. HACAN can be contacted at 13 Stockwell Road, London SW9 9AU, tel ; info@hacan.org.uk; website: February 2011