Head Office, Airport, Inverness IV2 7JB Telephone: (01667) 464212 Email: [email protected]

Commission Secretariat The Infrastructure Commission for PO Box 24137 Edinburgh EH2 9AJ

2nd May 2019

Dear Sir / Madam

Please find attached Highlands and Islands Airports Limited submission to the Commission’s Initial Call for Evidence and Contributions. We welcome this opportunity to contribute to the Commission’s work now and in the future.

Yours sincerely

Inglis Lyon Managing Director

Initial Call for Evidence & Contributions

1. Introduction

We welcome the establishment of the Infrastructure Commission and the opportunity to contribute to its work.

2. Distinctive Highlands and Islands Context

A. Inverness Airport

It is important that the geographical and economic context of the Highlands and Islands is properly understood1. For example, by far its largest airport is at Inverness which has approaching 900,000 passengers per year. However, its catchment area (the two local authority areas of Highland and Moray) has a low population of around 330,000 people-i.e. just 6% of all Scottish residents. This results in a low population density given that the catchment area covers around 28,000 km2-more than one third (36%) of the total area of Scotland.

This-and the distances to main economic centres-mean that air transport is vital to the economic and demographic viability of Inverness Airport’s catchment. The small internal market means that many businesses are heavily reliant on customers, suppliers, advisers and funders from outside Scotland-and internationally.

Many of the area’s companies operate in global markets. More than one third of local businesses that use the Airport are exporters. In turn, one third of these businesses are trading with countries outside the EU.

Thus, the catchment area’s key sectors tend to be intensive users of air services. These include tourism, life sciences, manufacturing (notably food and drink) and the nuclear industry. In particular, life sciences, tourism and energy are generally recognised as sectors whose staff have a high propensity to fly.

The number of terminal passengers at Inverness grew significantly (by 30%) between 2008 and 2017. This amounted to an increase of over 200,000 passengers: from around 670,000 to 875,000. This was aided by the introduction of the Amsterdam service plus the reinstatement of flights to Heathrow and Dublin.

The services to the two hubs at Heathrow and Amsterdam are vital for allowing business and leisure passengers access to the global flight network, given the very limited direct international flights from Inverness itself.

Without those routes an increased number of passengers would have to use either Aberdeen, Edinburgh or Glasgow for international travel. Some (notably inbound tourists) may choose not to make the trip at all.

1 The data in this section are taken from: Economic and Social Impact of Inverness Airport (for HIE and HIAL, 2018) and Socio-Economic Case For Retention of Highlands and Islands APD Exemption (for HITRANS, January 2019)

1 Using these other Scottish airports would mean a drive of more than three hours would be the norm, with a trip of over four hours from many settlements in the catchment area. As an example, many of the drive times to are longer than the equivalent road journey between Glasgow and Manchester.

B. Other Highlands and Islands Airports

The catchment area populations of the other Highlands and Islands airports operated by HIAL are much lower. For Wick John O’Groats, Sumburgh, Kirkwall and Stornoway they are between 22,000 and 30,000 residents.

At the other end of the scale the catchment area populations for flights from Benbecula, Barra, Tiree and Islay range from less than 1,000 to 5,000 residents. All the isles served by the internal and Shetland flights have populations of less than 600 people.

The economic specialisms/advantages of the airports’ catchment areas include manufacturing, nuclear industry, fishing and aquaculture, scientific research and development, and media. Tourism and energy (including renewables) are also particularly important to some of the areas.

These sectors are largely intensive users of air services and/or heavily reliant on external markets and investment. A 2016 survey2 found that over half of businesses that use the commercially operated air services generate more than 25% of their sales from external markets.

Surface travel alternatives to air are long, given that many include slow and infrequent ferry crossings to/from the islands. A key benefit of air is the potential ability to provide day trips in both directions between the communities and main economic centres.

Local residents using the smaller mainland or island airports do so to access social and leisure opportunities (including visiting friends and relatives) and also important services (notably health). They are also used by island residents who work away from home for periods-e.g. offshore. This is in addition to business travel by the private and public sectors.

The air routes between Inverness and the Outer Hebrides and have a significant amount of business passengers. This includes organisations which require staff to travel between the regional centre of Inverness and the islands-e.g. Police Scotland, NHS, local authorities and HIE.

3. Economic Impacts of Transport Infrastructure

A. Inverness Airport

As Inverness Airport has grown so have its economic impacts, clearly illustrating the benefits of the infrastructure investment that has taken place. Businesses located at the airport site or immediately adjacent to it employ over 550 Full-Time Equivalent (FTE) staff. This makes the Airport a major employment site within the Highlands and Islands.

These jobs are very well paid. Their average wage is over £34,000 per FTE-above the figures for both the Highlands and Islands and Scotland.

The Airport generates a total of 748 on-site FTE jobs (direct, indirect and induced) in its catchment area and 916 FTE in Scotland.

2 Appraisal of Inclusion of All Business Travel Within the Air Discount Scheme (2016, for HITRANS)

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In addition, visitor spend by inbound passengers to the area is around £89 million per annum. This supports c1,775 FTE jobs in the catchment area.

One quarter of these visitor impacts are generated by the two hub routes of Heathrow and Amsterdam. Further, some 25% of all visitor spend is in either Caithness and Sutherland or Lochaber, Skye and Wester Ross. This highlights the airport’s impact in the more remote and fragile parts of the airport’s catchment area.

The general evidence for the economic contribution of regional air services is noted by Peak Economics3:

“There seems a consensus in the literature that airports in peripheral regions have some stimulating effect on employment and population growth … there are positive economic impacts in the vicinity of airports from good quality regional air connectivity”.

B. Investments in Roads and Fixed Links

These positive impacts of infrastructure and investment in the Highlands and Islands are not confined to aviation. A research report4 examined a range of infrastructure investments in:

 Fixed links: Dornoch Bridge (opened 1991), Skye Bridge (1995), Berneray causeway (1998) and Eriskay causeway (2001).  Roads: including A830 Fort William-Mallaig improvements (completed in 2003 and 2009) and A851 on Skye (undertaken between 1997 and 2008).

The report found that such investments ”can provide economic impetus and enable new business activity, particularly where they build on existing assets”. Its notes the positive impacts as typically including labour market consolidation, increased commuting, higher visitor numbers and population retention.

It is essential that those making infrastructure investments decisions fully understand the significant impacts that improved accessibility can generate in parts of the country where the transport network remains relatively underdeveloped.

It is also notable that most of the road and fixed link projects referred to above took place a considerable time ago. That is also the case for the reductions in journey times effected by the Cromarty Bridge (opened in 1979) and Kessock Bridge (1981). Together with the Dornoch Bridge they significantly improved travel between Caithness and Sutherland, Easter Ross and Inverness and points further south and east.

Many of the projects referred to above received EU funding which has greatly reduced for transport projects since the 1990s.

These previous investments were beneficial as are those that are proceeding at present-notably upgrade of A9 between Inverness and Perth. However, it is also recognised that there are areas that need strengthening to build on previous investments. For aviation this relates to maximising the economic and social benefits of infrastructure investment by providing air services that meet the needs of the local economies and communities.

3 Wider Economic Impacts of Regional Air Connectivity (Peak Economics, for DfT, 2018) 4 Argyll and Bute Transport Connectivity and Economy Research Report (2016, for HIE)

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4. Highlands and Islands Air Service Issues

A. Fare Levels

There are two means by which fares levels are limited on internal Scottish air routes. First through the operation of Public Service Obligations (PSOs). These are publicly funded air services which set a defined frequency of service (including the ability to provide a day trip in both directions) and maximum fare.

The second is ’s Air Discount Scheme (ADS). This provides a reduction of 50% on core air fares for local residents making non-business flights on non-PSO internal Scottish services. ADS is also provided for non-resident students studying in the eligible areas and business flights made by local residents who work for third sector organisations.

Despite these mechanisms the cost of fares remains a significant issue for users of internal Scottish flights. Fare levels are still generally seen as high-by both business and leisure passengers. Previous research5 showed business travellers facing return air fares of between £106 and £515 on non-PSO internal flights in Scotland.

If Air Departure Tax (ADT) was introduced on Inverness’ outbound flights airlines could pass on the £13 charge in full to their passengers. Alternatively they could pass on some of the charge and treat the rest as a cost that their business would bear. Whatever approach the airlines might adopt there is a clear risk that without the current ADT exemption they could withdraw a route or reduce its frequency and/or increase fares.

This is in a context where, even with the current exemption, the lowest fares at Inverness tend to be more expensive than at Edinburgh, Glasgow and Aberdeen. Second, airlines already face a challenge in developing/sustaining certain types of route at Inverness. That is due to the catchment area’s small population and business base.

B. Frequencies and Day Trip Opportunities

On the non-PSO services the timetable is set by the airline. On some of the main routes (e.g. Shetland-Aberdeen, Stornoway-Glasgow) there are a number of flights per day and a day trip can be made in either direction.

However, this is not the case on some routes. For example a day trip in either direction is not possible on some of the flights to Scotland’s two main cities:

 Kirkwall-Glasgow.  Sumburgh-Glasgow.  Stornoway-Edinburgh.  Wick-Edinburgh.

Further, it is not possible to make a day trip by air to Inverness from either Orkney or Shetland during the winter.

The timings of these flights can mean up to two nights away from home in the central belt. For example, the single daily Wick to Edinburgh flight leaves at 1255 and arrives in the capital at 1440.

5 Appraisal of Inclusion of All Business Travel Within the Air Discount Scheme (2016, for HITRANS)

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If it is used to attend a 0930 meeting the following day then this will not allow enough time to catch the flight back to Wick on that day (which leaves Edinburgh at 1120).

For business travellers this will incur a cost per night of £100-£1206. That is in addition to the loss of productive time for staff who are away from the business for an extended period.

The alternative is to make the return journey by surface transport. For travel to the islands this would involve use of generally slow and infrequent ferry services. For Wick it would mean a drive of at least 6 hours-and even longer if public transport is used.

D. Wider Impacts of Fare Levels and Timetables

The consequences of the fare levels and frequencies on many internal air routes are, first, to reduce the attractiveness of the communities as places to live and work. This increases the challenges of staffing key posts (e.g. GPs) who will want to travel to/from the community for various purposes including visiting friends and relatives.

Experience also shows that younger people and economically active residents with families tend to be the most critical of existing transport services. It is these two groups in particular that are critical to the future prosperity and sustainability of their communities.

Second, reduced business productivity. High fares discourage business trips, while the schedules on some routes mean that staff are spending extended time on making the trip itself rather than engaging in productive activity.

Increasing productivity is a key aim for UK Government (as part of rebalancing the economy). It is also an essential part of Scottish Government’s Scotland’s Economic Strategy which notes that improving productivity “is the principal long-term driver of economic growth”.

In recent years, the three Scottish Government funded PSO air services have seen increased frequency and also improved day trip opportunities for residents of Tiree and Kintyre. Since 2013 passenger numbers have increased on:

 Glasgow-Barra from around 9,100 to 14,700 (+60%)  Glasgow-Tiree from around 7,500 to 11,700 (+55%).

This clearly points to the role of increased frequencies and limited fare levels in increasing demand and thus maximising the benefits of the public funding of the airports on Barra and Tiree.

In contrast there has been a reduction in the number of flights on some commercially operated services-e.g. Stornoway-Edinburgh, Wick-Aberdeen-over this period, plus the loss of the Stornoway-Aberdeen route at short notice in 2018.

5. Need for A Strategic Overview of Scotland’s Air Services

There is presently no overview of the transport infrastructure and services that the Highlands and Islands needs to support sustainable economic growth. That is both looking across all modes (road, rail, air and sea) and within individual modes.

6 Appraisal of Inclusion of All Business Travel Within the Air Discount Scheme (2016, for HITRANS)

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A wide range of organisations are involved in aviation in Scotland, notably:

 Scottish Government, funder of HIAL airports, ADS, and a number of PSOs.  HIAL, operating 11 airports.  Local authorities-Shetland Islands Council, Orkney Islands Council and Argyll and Bute Council fund the capital and operating costs of airports and the PSO services that use them.  Comhairle nan Eilean Siar, funding an internal PSO route.  Dundee City Council, funding the Dundee- PSO service.  Visit Scotland, supporting international route marketing and development.  Those with a strategic interest in aviation, including the development and promotion of projects-e.g. HITRANS, HIE.

A considerable amount of public money is spent on airports and scheduled air services each year. Despite this, the fares and frequencies on internal Scottish routes have largely evolved in a piecemeal rather than a planned manner. This includes the designation of some routes as PSOs while others operate based on the commercial decisions of the airlines.

That is not a criticism of the airlines, which are operating in the commercial framework set by Government. However, for these services there are no agreed criteria/minimum level of provision that the various communities need to support sustainable economic development.

This is in a context where there is a general expectation that a PSO service-at least for relatively large Highlands and Islands communities-should have a day trip opportunity in both directions based on at least two flights per day. For example, the Peak Economics report notes:

“In the main the requirement to have two return flights a day to permit day return trips with a full day at the destination is seen as the basic PSO standard” and also that, in terms of economic benefits:

“PSO services that do not permit day return trips with a reasonable amount of time at the destination would be expected to deliver very different levels of economic impact from those that do”

However, it is the case that some commercial routes within Scotland-e.g. Stornoway-Edinburgh and Wick-Edinburgh-operate only a daily single rotation with no day trip opportunity in either direction.

Some other countries have systems of measuring air connectivity. For example, two government agencies-Trafikverket and Transportstyrelsen-produce an index of domestic and international air connectivity for Swedish regions. That is based on the number of connections to the Swedish capital and onward to destinations in other countries based on the number of connected places and the time available there for a day trip.

Development of such an index for Highlands and Islands airports would allow gaps to be identified on an objective basis. Indeed, it could form part of a wider measure of connectivity requirements across all modes-e.g. looking at islands’ air and ferry provision as a whole rather than separately.

This could be developed using the approach adopted in Transport Scotland’s Ferries Review. That is, defining a required frequency of service based on understanding communities’

6 requirements for travel outside their local area to access employment, social activities, business clients/partners, health facilities, etc.

In addition to affordability and sufficient frequency there is also a need to give users/potential users some degree of security about the future availability of air services. The Peak Economics research notes that:

“there are reasons to believe that regional business activities prefer predictable conditions, including the quality of transport infrastructure and transport services. Predictability is important because expectations can affect location and expansion plans”

The same will also apply to individuals’ decisions on whether to move to or continue to live in a particular island/area.

6. Joined Up Infrastructure Planning To Maximise Economic Impacts

There is a need to consider the wider infrastructure requirements stemming from transport improvements. An investment in transport infrastructure could stimulate increased economic activity (e.g. more tourists visiting an island due to ferry service enhancements) that would increase demand for housing and particularly so for accommodation for workers.

This has become a very significant issue on Islay and Arran following economic growth stimulated by RET ferry fares. The shortage of housing is constraining economic and population growth on the two islands.

Also, the growing popularity of Skye and the Far North for tourists has placed considerable pressure on facilities such as car parking and public toilets. Limited provision of such supporting infrastructure constrains the economic benefits of tourism growth and of innovative developments such as the North Coast 500 road route.

This points to the need to consider the implications of infrastructure investment across a range of sectors. There is also a need to anticipate growth in demand from transport interventions rather than waiting until that growth has become a “problem”, in terms of capacity, environmental and other impacts. For example:

 The implications of reduced fares leading to increased vehicle demand and capacity constraints on ferries.  Airport terminals’ ability to accommodate peak demand where route development and passenger growth is forecast.

This points to a need for greater co-ordination across a range of organisations:

 Transport operators-e.g. Scotrail, ferry companies, airlines.  Transport infrastructure operators-e.g. HIAL, ports.  Local authorities.  Development agencies such as HIE and VisitScotland.

Dealing with possible environment impacts would include aligning with environmental policies. That would include supporting infrastructure to enable emerging technologies such as electric road vehicles and aircraft operated by innovative fuel sources.

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7. Summary

Small populations and business bases, distance from main centres and markets and long surface alternatives mean that air travel is essential to support sustainable economic growth in the Highlands and Islands.

Growth in passenger numbers at Inverness Airport means that it is now a major employment site, a generator of significant tourism impacts, and the means of business access to markets outside Scotland. The Heathrow and Amsterdam services are a crucial part of this as they allow ready access to global markets.

The economic impacts generated by Inverness Airport reflect the general evidence of economic growth associated with regional air services. There is a need to ensure that Inverness Airport retains its current network and that services continue to develop and there is suffcient terminal capacity to cope with potential growth.

This, and other evidence for road and fixed links investments, demonstrate the economic benefits of infrastructure investment. This is particularly the case in more rural remote areas where the transport network is still relatively underdeveloped. However, the number of major transport infrastructure projects in the rural/remote parts of the Highlands and Islands has decreased since the 1990s/early 2000s.

A considerable number of organisations are involved in providing scheduled internal air services in Scotland. However, these services have developed in a piecemeal manner. There is no clear strategic overview of the types of air services that would best support sustainable economic growth and thus provide the most effective use of public funding.

Despite public sector support to internal Scottish air services, there remain issues about fare levels, and service frequency and timings on some commercially operated routes. Development of Scottish Government funded PSOs has seen improved timetables and capacity and significant traffic growth. This is in contrast to some of the commercial services which continue to have limited frequency, no day trip opportunities, high fares (especially for business travellers) and uncertainty over future provision.

This has wider impacts in terms of, first, attracting/retaining key demographic groups in the islands and remote mainland communities. Second, pulling down business productivity by increasing the time and financial costs of making trips to visit customers, suppliers and other business partners.

There is a need to consider in advance the wider infrastructure requirements (e.g. housing, visitor facilities) stemming from transport improvements. This has become a significant issue in a number of parts of the Highlands and Islands.

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