February 26, 2018 Ms Lilian Greenwood MP Chair, Transport Select Committee House of Commons London, SW1A 0AA Airport revenue per passenger vs airline revenue per passenger Dear Ms Greenwood, Following on from the final airline Transport Select Committee session on February 20, I would like to highlight how the evolution of airlines base fares have decreased on average by 10% at Heathrow. This is driven by fierce competition between airlines but their resulting efforts to reduce costs have been offset by increases in both airport charges and taxes. Over the same 10 year period, the revenue earned per passenger by HAL has risen by 167%. The IATA evidence attached in Annex 1 shows HAL s ability to continue to grow revenues, even with a Q6 settlement that sees only a marginal reduction in the price cap. Also, for comparative purposes, some of the recent evidence in Annex 2, extracted from CAPA Centre for Aviation 1 is fully complementary and also confirms that Heathrow is considerably more expensive than other European hubs and that aeronautical yield has grown much faster than other London airports over the past decade. The attached evidence is very relevant to affordability discussions underway regarding expansion and also to the weak incentives placed on HAL to tackle costs aggressively. Yours Sincerely, Rafael Schvartzman Regional Vice President for Europe International Air Transport Association (IATA) 1 https://centreforaviation.com/
ANNEX 1: IATA supplementary submission to Transport Select Committee Airport revenue per passenger According to the 2016 Leigh Fisher Airport Performance Indicators report, between 2006 and 2016 aeronautical revenue 2 earned by Heathrow increased by 167%. Adjusting for inflation over the period, this equates to a 97% increase. As shown by Figure 1, the Leigh Fisher data indicate that Heathrow s revenue per passenger rose consistently through the period, even following the modest reduction in the recoverable price cap on those elements of revenue that are regulated by the CAA since the start of Q6. The airport operator has managed this by continuing to increase its revenue from nonregulated airside services, such as airside concessions and catering. This is in addition to continue to grow revenue from duty-free retail and landside services such as car parking. Growth in both these elements has continued to consistently outpace passenger growth. This analysis demonstrates HAL s strong position over both regulated and non-regulated areas of the airport operation and its ability to continue to grow revenues, even with a Q6 settlement that sees a marginal reduction in the price cap. These findings are relevant both to affordability discussions regarding expansion and also to the weak incentives on HAL to tackle costs aggressively. Airline revenue per passenger By way of comparison, between 2006 and 2016, the basic revenue per passenger 3 earned by airlines through fares increased by 24% in nominal Sterling terms. Taking inflation into account, basic air fares fell by 6% over the period. This real terms fall in air fares was partially offset by increased airline revenue from ancillaries and other fees. However, as illustrated by Figure 2, the share of the average all-in air fare that accrues to the airlines has decreased from 93% in 2006 to 83% in 2016 as fierce competition between airlines and airlines resulting efforts to reduce costs have been offset by increases in both airport charges and taxes. 2 Regulated charges plus revenue from airside concessions (excludes duty free and bureaux de change) 3 Airline fare net of taxes, fees and other surcharges
APPENDIX Figure 1: Evolution of Air Fares and Airport Charges at Heathrow, 2006-16 Source: Leigh Fisher, PaxIS, OANDA Figure 2: Breakdown of an average one-way all-in air-ticket from LHR, 2006 vs 2016 Source: IATA Economics based on PaxIS, TTBS, Airline Analyst
ANNEX 2 Extract from CAPA Centre for Aviation - analysis 4 7 Aeronautical yield is simplest measure of airport charges The simplest indicator of the level of airport charges is the average aeronautical revenue income per passenger (also often known as the aeronautical yield) generated by the airport company. This is the total revenue from aeronautical activities (i.e. excluding revenue from commercial, real estate and other activities) divided by the number of passengers. 7 Heathrow's aeronautical yield has fallen since 2014, but is more than twice its 2007 level Heathrow's aeronautical yield has actually been falling since 2014. The current regulatory period, which began on 1-Apr-2014, limits price increases to 1.5% below the rate of increase in the UK's retail price index. In the nine months to Sep-2017, Heathrow's aeronautical yield fell by 2.1%, to GBP21.81. This was 4.9% below its 2014 peak of GBP22.94, but still considerably more than double its 2007 level of GBP9.35 (an increase of 133%). London Heathrow Airport: aeronautical revenue per passenger (GBP) and passenger numbers (million) 2007 to 2017* *2017 aeronautical revenue per passenger figure is for 9M2017; pax figure is for 12M2017. Source: CAPA - Centre for Aviation, Heathrow Airport Holdings Limited. 4 https://centreforaviation.com/insights/analysis/heathrow-vs-other-european-airportsmuch-more-expensive-airlines-want-terminal-monopoly-broken-up-399512
7 Heathrow's aeronautical yield is much higher than at other London airports Moreover, in spite of the decline since 2014, Heathrow's charges have increased much more rapidly than those of other London airports over the past decade. This has pushed its aeronautical revenue yield even further ahead of the rest. Using most recently available full year figures for London's six airports (i.e. 2016 or nearest financial year), Heathrow's aeronautical revenue per passenger is more than four times that of Stansted and Luton and nearly three times Gatwick's. It is 18% higher than at London City, which achieves a very high yield through its strong focus on business travellers and its close proximity to London's financial district. London Southend Airport does not separately disclose its aeronautical revenue per passenger, but it is likely to be around half of Heathrow's, according to CAPA estimates. Heathrow also hugely outperforms the other London airports on non-aeronautical revenue per passenger, adding to the argument that it could afford for its airport charges to be more tightly capped. London airports: revenue per passenger (GBP) 2016* *Note: revenue per passenger based on Dec-2016 year end for Heathrow, Luton & City; Mar 2017 year end for Gatwick and Stansted; Feb-2017 year end for Southend. Source: CAPA - Centre for Aviation, airport company accounts.
7 Heathrow's higher charges not fully justified by longer average trip length To some extent, Heathrow's higher aeronautical revenue per passenger is justified by the longer average trip length for passengers taking flights with its airlines. Longer flights typically charge a higher fare and this better enables airlines to pay a higher per passenger charge to the airport. Nevertheless, even allowing for its longer average trip length, Heathrow's aeronautical yield is high by comparison with other London airports. The chart below is a scatter plot of aeronautical revenue per passenger against average trip length for five London airports in 2016. Heathrow sits noticeably above the trend line, illustrating its high charges relative to trip length. The chart also emphasises how far above the trend line business-focused London City sits. London airports: aeronautical revenue per passenger (GBP) vs average trip length 2016* *Note: revenue per passenger based on Dec-2016 year end for Heathrow, Luton & City; Mar 2017 year end for Gatwick and Stansted; Feb-2017 year end for Southend. Average trip length calculated as ASK divided by seats for calendar 2016. Source: CAPA - Centre for Aviation, airport company accounts, OAG.
7 Heathrow is also expensive versus other European airports A comparison with the other main IAG airports further supports Mr Walsh's view that Heathrow's airport charges are high. Iberia's main hub is Madrid, while Vueling's main base is Barcelona and Aer Lingus' main hub is Dublin. Separate revenue figures for these individual airports are not available, but analysis of data from AENA (owner and operator of Madrid and Barcelona) and DAA (owner/operator of Dublin) is possible. This shows that Heathrow's 2016 aeronautical yield was 2.5 times AENA's and 2.9 times DAA's. In each case, this is disproportionate compared with Heathrow's longer average trip length. Heathrow is also more expensive than Europe's other three leading hub airports. Its 2016 aeronautical yield was 2.3 times Amsterdam Schiphol's, 1.8 times Frankfurt's and 53% higher than the average of the two main Paris airports owned by Groupe ADP (Paris CDG and Paris Orly, whose revenues are not separately reported). Again, the difference between Heathrow's aeronautical yield and those of these other European airports is not all justified by Heathrow's longer average trip length. (Note that the aeronautical revenue figures used in these calculations include revenues for security activities at Amsterdam, Frankfurt and Paris, which is an activity not carried out by Heathrow airport.) London airports, DAA, AENA, Groupe ADP, Frankfurt and Amsterdam: aeronautical revenue per passenger (GBP) vs average trip length 2016* *Note: revenue per passenger based on Dec-2016 year end for Heathrow, Luton, City, DAA and AENA; Mar-2017 year end for Gatwick and Stansted; Feb-2017 year end for Southend. Average trip length calculated as ASK divided by seats for calendar 2016. Source: CAPA - Centre for Aviation, airport company accounts, OAG.