STAL/2/2

TRANSFORMING LONDON STANSTED AIRPORT

35+ PLANNING APPEAL

Air Traffic Forecasts

Dan Galpin

Proof of Evidence

December 2020

STAL 35+ Appeal – Air Traffic Forecasts

1 Introduction

1.1 My name is Daniel Galpin. I am a Director at ICF, a global consulting services company (www.icf.com), working within the Aviation department. ICF has advised governments and corporations for 50 years, over which time it has grown from a boutique US consultancy to a global consultancy firm with over $1.4bn in revenues. Our aviation practice was founded as SH&E in 1963 and, after being acquired by ICF in 2007, we further expanded with the acquisition of AeroStrategy in 2011. Today we are one of the world’s largest aviation consulting organisations, providing consultancy services to airlines, airports, lessors, financial institutions, manufacturers and governments. We have dedicated aviation offices in London, Boston and New Delhi.

1.2 I graduated from the University of Bristol, with a First-Class Honours degree in Maths and Physics and have over 15 years of experience in the aviation industry. I started my career in 2003 at NATS, the UK’s Air Navigation Services Provider. I worked in their Operational Safety department and later in their forecasting department using a predecessor of the DFT’s aviation forecast model to project UK air traffic. These forecasts covered the entire UK airspace, including en-route flights (flights through UK airspace, but not arriving at or departing from a UK airport) and were a key input to the company’s capacity planning and revenue forecasting. In 2010 I joined Virgin Atlantic where I was a Revenue Manager and set up a Revenue Management Analytics team. During my time at Virgin Atlantic I was responsible for a portfolio of routes, using sophisticated software to forecast and optimise revenues on a flight-by-flight basis. I spear-headed an initiative to improve the data visualisation and analytics capability, as well as being involved in network planning decisions and assessing potential new routes. I then joined ICF in 2013 as an aviation consultant.

1.3 As a consultant with ICF, I have provided a broad range of consultancy services to clients from across the aviation spectrum, from airports to investors to airlines. One of my key areas of expertise within the ICF aviation team is in air traffic forecasting, combining established mathematical modelling expertise with real-world experience from my time at NATS and Virgin Atlantic, and prior consultancy projects. I have provided traffic studies and traffic forecasts to clients all around the world, and our forecasts are trusted and relied upon by a variety of aviation stakeholders, including: airports for long-term capacity planning, investors in buying or selling assets, airlines for strategic decision making and banks’ lending decisions. Recent experience in the London system includes working on Gatwick airport’s second runway submission to the Airports Commission where we served as their traffic advisor and forecaster, and providing technical due diligence and traffic forecasts to the winning consortium in the London City Airport sale. Beyond London, I have personally worked on numerous assignments in the UK and globally, including many of the major multi-airport systems around the world: Paris, Brussels, New York, Delhi (planned secondary airport on a new site), Mumbai (planned secondary airport on a new site). I have advised major airlines (including easyJet and Virgin Atlantic) on subjects such as network strategy, fleet planning and fuel procurement. I have also advised governments (including the UK Department for Transport and the European Commission) and industry groups (e.g. Airports Council International (ACI), for which I am ICF’s

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nominated attendee at the ACI-Europe Economics Committee). I have presented at conferences around the world, written ICF research papers, and appeared on panels and webinars.

2 Scope of Evidence

2.1 ICF were retained by STAL to provide air traffic forecasts in support of the 35+ planning application. Our forecasts provided input to many of the other workstreams, notably noise, air quality and carbon. In the 2018 ES, we were asked to model two scenarios related to Stansted’s planning application:

Do Minimum scenario: Stansted retains its 2008 planning permission, limiting the airport to 35mppa and 274,000 annual aircraft movements (of which passenger ATMs cannot exceed 243,500 and Cargo ATMs cannot exceed 20,500)

Development Case scenario: In the development case, we retain the overall 274,000 movement cap, but allow for a greater proportion of PATMs while compensating for this by reducing the CATM allowance from 20,500 CATMs to 16,000 CATMs. After accounting for the necessary number of PATM and CATM positioning flights, the remaining allowance for PATMs equates to a passenger throughput which is around 43mppa once the projected growth in passenger loading (passengers per aircraft movement) is accounted for. The 43mppa figure is adopted as a hard cap on passenger volumes, alongside the overall movement limit of 274,000 and the 16,000 CATM limit.

2.2 Our research and forecasts demonstrated that, given the opportunity to grow to 43mppa, Stansted would be able to further build on its network, capture local demand currently utilising airports further afield and play a greater role within the London airport system. Moreover, due to underlying macro-trends that are favouring larger aircraft types for short haul operators, and the natural and inevitable transition to next generation fleet (which has already started), we forecast that fewer ATMs will be required to carry 43m passengers in the future than would be required today1, and that more than 50% of these aircraft types will be next generation aircraft types2 – quieter, cleaner and more efficient than the current generation3.

2.3 In 2020, ICF were asked to provide updated air traffic forecasts for use in connection with STAL’s Appeal, which are detailed in the ESA. The scenarios we were asked to model were the same as in the 2018 ES, with the addition of a second Development Case (‘Covid Base’ and ‘Covid Low’), to illustrate the significant uncertainty generated by the ongoing Covid-19 pandemic.

2.4 This updated scenario utilised the same model as the 2018 ES, with updated inputs. We also incorporated a ‘Covid overlay’ to reflect the extraordinary circumstances that could not be captured through a purely econometric modelling exercise. The results of this scenario demonstrate the impact of the pandemic – effectively delaying the point at which Stansted reaches 35m and 43m by between 4 and 6 years. However it also reflects a number of underlying trends that will survive the current pandemic: the demand for air travel will recover to growth, capacity constraints at London’s airports will remain, the transition to next

1 Passengers per ATM are forecast to grow from 164 to 170 2 Predominantly the Airbus A320 neos and Boeing 737 Max aircraft types 3 Predominantly the Airbus A320 ceos and Boeing 737 NG (e.g. Boeing 737-800) aircraft types

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generation aircraft types will continue. This latter underlying trend (fleet mix) results in a greater proportion of next generation aircraft types in the 43mppa year in the updated Development Case forecasts than in the 2018 ES due to the fact that the airport reaches this point at a later date (2032 vs 2028).

2.5 In this Proof I will present an overview of the forecast methodology, and the key assumptions that underpin the different scenarios. This will demonstrate a robust and industry-standard methodology (Section 3).

2.6 I will also address specific comments from the UDC and SSE Statements of Case in Sections 4 and 5, respectively. In these sections I will cover the impact of Covid-19, providing commentary and evidence that suggest Stansted and its airline customers are better placed than most to recover. Finally, I address concerns raised by UDC and SSE that delays to the Boeing 737 Max programme could jeopardise the validity of our fleet mix/transition assumptions. I will provide updated evidence on the status of the programme that supports our assumption in the 2020 ESA that deliveries will recommence in 2021. I also demonstrate that the underlying pressures on airlines such as Ryanair will ensure that fleet transition is a necessary step in order to facilitate growth and replace the large number of aircraft that are due to be retired in the next decade.

2.7 This document builds upon Chapter 4 of the 2018 ES4, and Chapter 4 of the 2020 ESA5.

3 Summary of Air Traffic Forecasting Work

ICF’s Forecast Methodology Overview – London Market Demand 3.1 London is served by 6 airports (Heathrow, Gatwick, Stansted, Luton, London City & Southend) with overlapping catchments (for example, all serve inbound visitors to London), and so demand is considered at the “London-level” before being allocated to the individual airports.

3.2 ICF’s London (unconstrained) passenger demand forecast model involved segregating the demand by market (e.g. domestic, short-haul Europe etc), identifying drivers for each of these markets and establishing the relationship between the drivers and market segment using regression analysis. This approach to demand forecasting is standard in the industry – it is described in the ICAO6 Manual of Air Traffic Forecasting as “by far the most popular method of forecasting civil aviation demand”. It is also consistent with the approach used by the UK Department for Transport’s National Air Passenger Demand Model7.

3.3 In this case, the key drivers were determined to be GDP growth from the UK and destination market and the price of air fares (predominantly influenced by oil price). The relationships (“income elasticities” for the GDP coefficients, “price elasticities” for the price coefficients) were determined through historical analysis. Independent forecasts were sourced for GDP (Oxford Economics) and oil price (EIA) forecasts.

4 CD 3.4 Chapter 4 2018 ES 5 CD 7.4 Chapter 4 2018 ESA 6 International Civil Aviation Organisation 7 Described in CD 14.14 DFT DFT UK Aviation Forecasts 2017

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3.4 This approach shares many similarities with the DFT aviation forecast model, and the income and price elasticities applied in our model were similar to those used in the DFT model.

3.5 It is no surprise therefore that when we compared our 2018 ES forecast to the DFT’s 2017 forecast we found broad agreement in the trajectory of unconstrained demand in the London system, with long-term growth rates of c. 1.6-2.1% p.a.

ICF’s Forecast Methodology Overview – Airport Allocation 3.6 The London demand is allocated at a market-level to the individual airports based on historical performance, catchment areas, network reach and depth, and supply-side considerations (e.g. airline strategies, cost of operation).

3.7 Many of these factors will benefit Stansted relative to its peers. The airport’s catchment – extending from central London to much of East Anglia – contains some of the fastest growing areas in the country (in 2018, the 3 fastest regions in the UK were London, West Midlands & East of England8). As the airport grows, it will offer more destinations and more frequencies which will in turn make it more attractive to customers and capture some of the 7.5m passengers that are currently traveling to/from Stansted’s Core Catchment via Heathrow or Gatwick9. Stansted is also the largest base in Europe of Ryanair – not only Europe’s largest airline10, but one of its fastest growing, most consistently profitable (it has made an operating profit in every year from 2008 to 201911), and lowest cost. The commercial focus brought by MAG following its acquisition of the airport has led to long-term deals being signed with Ryanair and others – guaranteeing competitive charges to the airlines in exchange for growth. All these factors combine to make Stansted extremely competitive in a Europe-wide market and will drive gradual improvements in the airport’s share of London traffic over time.

3.8 In addition to the natural growth in its catchment, capacity constraints at other London airports will also drive traffic to Stansted. Building on the unconstrained airport allocation, we factor in binding capacity constraints and where demand exceeds capacity, the model re-allocates (where possible) demand to airports with spare capacity. If allowed to grow to 43m, the airport will be able to play an increasingly important role in a system with very limited capacity.

3.9 As explained in the ESA, our approach to capacity constraints at other London airports is based on the legal planning limits that are in place today. We believe that there are sufficient uncertainties and challenges with the third runway project at Heathrow that this will not be operational in the timeframe considered in these forecasts12, and as such the airport is limited to its annual ATM cap of 480,000 throughout. London City is limited to 6.5mppa and Luton is limited to 18mppa per their respective planning permissions. Gatwick airport does not have a

8 Source: https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/regionaleconomicactivitybygrossdo mesticproductuk/1998to2018 9 Source: CAA airport survey, 2019. Stansted’s “Core Catchment” defined as Cambridgeshire, Essex, Suffolk, parts of Hertfordshire, parts of Norfolk and East/North East boroughs of London (Barking & Dagenham, Haringey, Havering, Newham, Redbridge and Waltham Forest) 10 As measured by passenger volumes in 2019 11 Source: Airline annual reports 12 The reasons for this are detailed in paragraphs 4.2.11 – 4.2.13 of the ESA

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hard limit on passengers or ATMs but is nevertheless bound by the capabilities of its single runway.

3.10 Where there are hard passenger caps, airports are held at these figures (e.g. in the Do Minimum case, Stansted is assumed to remain at 35mppa). However, where airports are limited by ATM limits (as is the case at Heathrow) or infrastructure (as in Gatwick), we allow incremental growth in passenger throughput over time. In this way, despite Heathrow having already virtually (in 2019) exhausted their annual ATM cap of 480,000 we allow them to grow incrementally through gradual increases in passenger loading (that is, the number of passengers per aircraft movement). Gatwick is already at its runway capacity in peak summer days (2019), but through peak-spreading and increases in passenger loading we allow them to grow to in excess of 50m.

3.11 What is clear, is that there is limited ability for other London airports to grow significantly beyond their 2019 levels, and it is only a matter of time before the London system runs out of capacity. Our modelling shows that by 2027, Stansted will also have exhausted its current 35mppa limit13. However, in the development cases, where Stansted is allowed to make best use of its existing runway, the airport would continue to grow, reaching its proposed cap of 43mppa by between 203214 and 203415. In doing so, the airport, alongside Luton and Southend, would provide a greater degree of geographic balance to the London airport system (albeit still a minority share compared to the larger Heathrow and Gatwick airports).

ICF’s Forecast Methodology Overview – Passenger ATMs 3.12 The number of passenger ATMs forecast at Stansted is a derivative of the annual passenger forecast. They are calculated by dividing the number of annual passengers forecast by the average passengers per ATM (Pax per ATM) forecast in that year. The Pax per ATM is itself forecast through a combination of aircraft size (seats per ATM) and passenger load factor (the proportion of seats that are sold).

3.13 Load factors at Stansted have grown considerably over the past decade (from 77% in 2009 to 89% in 201916), but with load factors nearing 90% there is inevitably limited scope for this metric to improve much further in the future. Similarly, the average aircraft size has grown from 177 seats per ATM in 2009 to 183 seats per ATM in 201917.

13 ESA Do Minimum scenario 14 ESA Covid Base scenario 15 ESA Covid Low scenario 16 Source: CAA Airport Statistics 17 Source: CAA Airport Statistics

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Source: CAA data, Passenger ATMs only

3.14 To project how the average aircraft size will develop, we considered the overall trends and the fleets and order books of the airport’s major airlines. Both the trend analysis and the airline- level analysis (e.g. Ryanair transitioning from 189 seat Boeing 737-800s to 197 seat Boeing 737 Max; easyJet transitioning from a combination of 156-seat A319 and 186-seat Airbus A320s to Airbus A320s and 235-seat Airbus A321s18) suggest that the growth in aircraft size will continue but at a lower rate than previously experienced.

3.15 At an airport level, we forecast, in the ESA Covid Base Case scenario, that the average passengers per ATM increases from 163 in 2019 to 171 in 2032, when the airport reaches 43mppa. This is very slightly higher than the forecast passenger per ATM in the 2018 ES (170) due to the fact that we now reach 43mppa 4 years later, and as a result a higher share of current generation aircraft have been replaced by larger, next generation aircraft.

3.16 Unless there is a fundamental change in the traffic make-up of Stansted Airport (which we judge highly unlikely), the level of uncertainty on the future passengers per ATM is relatively low – for the majority of Stansted’s traffic we know what types of aircraft they will be operating. As such, the number of PATMs associated with a 43mppa passenger throughput can be forecast with relatively high confidence.

ICF’s Forecast Methodology Overview – Cargo Tonnes and ATMs

3.17 Cargo is forecast in much the same manner as passengers, in this case the starting point is demand for cargo tonnes to/from (and connecting at) London’s airports. This demand is allocated to the airports in two stages: first, cargo is allocated to passenger aircraft (“belly freight”), based on the operators and markets (LCCs for example tend not to carry freight).

18 Source: CAPA Fleet Database

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Second the remaining cargo demand is allocated to dedicated freighters, the majority of which utilise Stansted Airport (68% of London freighter activity was at STN in 201919).

3.18 Stansted’s belly freight increases over time due to the diversification of airlines and markets, with more frequencies from the likes of Turkish Airlines and Emirates for whom belly hold cargo is an important revenue generator. Nevertheless, the proportion of belly freight at Stansted will remain a small proportion of overall cargo activity.

3.19 Capacity for dedicated freighters is arguably even more constrained in the London market, with airports typically targeting passenger operators due to the higher revenues associated with these compared to cargo operators, which has in turn driven investment in passenger facilities and related infrastructure (e.g. public transport hubs). Further, the Government’s 1991 Traffic Distribution Rules prohibit the use of freighter movements at Heathrow and Gatwick during ‘periods of peak congestion’ to prevent them conflicting with passenger airline requirements. Consequently, freighter movements now account for a tiny share of Heathrow’s traffic (just 0.5% of movements in 2019) and Gatwick no longer has any freighter movements. Luton’s activity is limited by its short runway, which prevents it from serving widebody jets.

3.20 These constraints and the fact that air freight to/from the UK is a relatively mature market means that the past decade has not seen the same levels of growth as seen in passenger volumes. Nevertheless, the market has grown, with cargo tonnes handled by London’s airports growing by 2.3% p.a. over the past decade20. Likewise, with passenger demand, economic growth in the UK and its trading partners is likely to drive future (albeit modest) growth, and Stansted is one of the few airports that can accommodate this growth. Our forecast sees Stansted’s cargo volumes growing from 234k Tonnes in 2019 to 375k Tonnes in 2032 in the Development Case, which drives commensurate growth in CATMs at the airport. Whilst this represents c. 60% growth in cargo tonnage at Stansted, the growth in absolute terms (140k tonnes) represents just 7% of the total cargo handled at London’s airports in 2019 (2m tonnes21).

3.21 Under the Do Minimum case, we assume that once passenger volumes are saturated (at 35mppa), the lower levels of PATMs will provide opportunity and space for cargo operators to grow at the airport. As a result, these scenarios generate higher levels of cargo activity than the Development Cases.

ICF’s Forecast Methodology Overview – Other Movements

3.22 Other movements primarily consist of passenger and cargo positioning flights, business aviation and air taxis, training and recreational aviation. Positioning flights are forecast to grow in line with PATMs and CATMs (i.e. we assume a constant share of ATMs are required for positioning). The remaining movements are highly sensitive to the available capacity - by their nature, these movements are not scheduled as far in advance as commercial operators and consequently, commercial operations have a de facto priority over scarce slots. As a result, in the Development

19 Source: CAA airport statistics, based on cargo movements 20 Source: CAA airport statistics, belly and freighter cargo combined 21 Source: CAA airport statistics, belly and freighter cargo combined

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Cases, this component of the Other Movements will be squeezed out of the airport in favour of commercial ATMs.

Summary of Aircraft Movement Forecasts

3.23 To summarise, the composition of the aircraft movements (PATMs, CATMs, Other Movements) is not arbitrary – each is derived using standard methodologies. PATMs are derived from passenger volumes and the passenger per ATM. Similarly, CATMs are a consequence of the freighter tonnes allocated to Stansted and tonnes per ATM. Finally, Other Movements are built up from PATM and CATM positioning flights and the available space for growth in business aviation.

4 RESPONSE TO UDC

Impact of Covid-19 Pandemic (paragraphs 2.21 – 2.24 of the UDC Statement of Case) 4.1 The section above outlines the typical top-down approach to forecasting air travel demand, linking demand to income levels and price. However, since the onset of the Covid-19 pandemic, it is clear that these factors are not the only key determining factors in the level of aviation activity at the current time. Whilst there is an economic impact, the main factors behind the un- precedented fall in air traffic demand in 2020 are travel restrictions and lockdown measures imposed by national governments (both in the UK and abroad).

4.2 As a result, for the first 4 years of the forecast, we employed a Covid-19 overlay which over-rode the macro-economic forecast. The overlay was based on an assumption that the pandemic “ends” (be it through vaccine, effective treatment or other means) in 2021, with a two-year recovery period thereafter (2022-2023) to return to pre-pandemic traffic levels. In 2024 we merge back to the top-down macro-economic forecast.

4.3 The impact of the pandemic is to effectively push back our 2018 ES forecasts by between 4 (Covid Base scenario) and 6 (Covid Low scenario) years. There is little doubt that the pandemic has caused great harm to the aviation industry for all the reasons indicated in UDC’s Statement of Case, paragraph 2.21. However, we do consider that traffic will recover. Leisure traffic has shown itself resilient to various crises – in just the last 20 years, the industry has contended with terrorist attacks (e.g. 9/11), the Global Financial Crisis and previous epidemics. Whilst these have certainly had significant short-term impacts, the industry – driven predominantly by leisure travel (and the desire for people to travel) – has recovered each and every time. There appears to be little evidence from China and South Korea that the ‘grey’ market (older travellers) was permanently depressed following the SARS and MERS epidemics. Even in the current pandemic, there is evidence to suggest domestic aviation activity in China has largely recovered to pre- pandemic levels22.

4.4 UDC also notes the increasing levels of competition in the London system (Paragraph 2.22), something we would agree with. Stansted is, however, well placed to respond to this

22 https://www.flightradar24.com/blog/can-we-learn-from-chinas-traffic-recovery/

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competition. The airport is less exposed to the long-haul market and business sectors, which are likely to see prolonged recovery curves and potential (in the case of the business sector) structural change due to changing work habits. Further, its airline clients are among the fastest growing and competitive in the industry – crises tend to favour low cost airlines, of which Ryanair is a world-leader. Analysis of actual flight movements in Europe over the summer shows that Ryanair operated a much higher proportion of pre-pandemic flights than other operators: Ryanair flights were down 37%23 in August 2020, compared to the European average of -50%24. Moreover, as will be demonstrated in the following paragraph, its airlines (in particular Ryanair) are some of the most financially resilient in the industry.

4.5 Finally, in UDC’s Statement of Case, paragraph 2.23, UDC raise concerns over the robustness of the airlines serving the London market and how this may influence fleet mix. Airlines are of course under tremendous strain – to date, this has not resulted in bankruptcies due, predominantly, to national governments providing financial support to their airlines. Whilst other airlines have been reliant on state aid25, often with accompanying restrictions that will hamper their ability to lead the recovery, Stansted’s top three airlines (Ryanair, easyJet and Jet2) remain financially viable without having to draw upon state aid other than receiving loans as part of the UK’s Covid Corporate Financing Facility and utilising the Government’s furlough scheme. Stansted’s largest airline, Ryanair, would have recorded an operating profit between July and September 2020 were it not for write-downs related to hedging, and currently has cash reserves of €4.5bn26, equivalent to 20 months of operating expenses27. Stansted’s second largest airline, easyJet, has cash reserves of £2.5bn, equivalent to 12 months of operating expenses28. Since the Covid pandemic, easyJet announced the closure of its base at Stansted, and completed a transaction with Ryanair to transfer the majority of their slots to Ryanair – a positive signal from Ryanair of its continued commitment to the airport. Advanced schedules suggest that Easyjet will continue to serve Stansted using away-based aircraft, albeit at lower scale. Since opening its Stansted base in 2017, Jet2 has grown rapidly, carrying over 2m passengers in 2019 and making it the third largest airline at the airport. 2017 also saw the airline open a base at Birmingham, which together with Stansted has contributed to the airline more than doubling in size between 2016 and 201929. Despite this growth, the airline reported a strong cash balance of over £1bn30, and has stated that they have sufficient liquidity to survive a scenario in which no flights could be operated until August 202131. This demonstrates confidence that these airlines will remain financially solvent through what will be a challenging winter and will put them in a strong position to lead the European industry out of this crisis. This

23 Source: Eurocontrol, https://www.eurocontrol.int/Economics/DailyTrafficVariation-AOs.html 24 Source: Eurocontrol, https://www.eurocontrol.int/Economics/DailyTrafficVariation-States.html 25 Examples include: Lufthansa has received a €9bn state aid package, Air France-KLM has received a combined package of over €10bn from the governments of France and the Netherlands 26 As of September 2020. Source: Ryanair H1 FY21 Results 27 Based on April to September 2020 costs 28 Source: easyJet trading update for FY2020, months of cost figure based on H2 FY2020 average monthly costs 29 Jet2 passenger volumes grew from 6.7m in 2016 to 14.4m in 2019 (Source: CAA Data) 30 Source: https://www.jet2.com/News/Dart_Group_PLC_s_Annual_General_Meeting_Statement_and_Proposed_N ame_Change/ 31 https://www.flightglobal.com/strategy/jet2-parent-has-sufficient-liquidity-for-a-year-without- flights/139711.article

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readiness to grow is demonstrated further by Jet2’s announcement that they will be opening a new base at Bristol in 2021 and the fact that Ryanair have not only maintained their existing fleet size but continue to expect deliveries of the Boeing 737 Max in 2021 (this is discussed further in paragraph 4.7 onwards). Dubai-based Emirates is the main provider of long haul connectivity from Stansted and, despite the current challenges associated with long-haul markets, is a large and well-funded airline that has demonstrated an historical commitment to the UK market.

4.6 In terms of the impact of the crisis on fleet development, it could accelerate the transition to new aircraft types. We have already seen airlines retiring older aircraft prematurely (e.g. BA and Virgin’s retirement of B747s). This is a rational response to a situation in which most airlines find themselves with more aircraft than they require, due to the collapse in demand. This has resulted in airlines having to ground a large number of aircraft. Rather than continue incurring fixed costs for these aircraft, some airlines are choosing to bring forward retirements of individual aircraft or entire sub-fleets (the latter providing further cost reductions due to rationalisation of pilots, maintenance etc). During the recovery, this lost capacity will be absorbed by the remaining fleet and receipt of new aircraft, potentially increasing the rate of transition to newer types of aircraft. This transition could potentially be negatively impacted in a low growth scenario in which a prolonged recovery timetable results in airlines delaying or cancelling orders for new aircraft. This scenario is considered in the ‘Covid Low Development Case’ scenario in which the year in which Stansted reaches 43mppa is delayed by 2 years, and we assume a slower rate of fleet transition.

Aircraft fleet (paragraphs 2.18 – 2.20 of the UDC Statement of Case) 4.7 The Fleet Mix model was used both to determine the aircraft size (seats per ATM) and as a key input to the environmental workstreams. For each airline/market combination the current aircraft types in operation at Stansted are used as the baseline fleet mix. The type of aircraft in operation at Stansted in future years takes into account this baseline mix and evolves to take into account known developments (e.g. airline order books), as well as underlying trends. As is the case with any long-term forecast, a snapshot of airline orders can only tell part of the story: airlines will be making future orders that are not captured in the current orderbook.

4.8 Our approach uses the known data points and overlays a transition to next generation aircraft types32. The combination approach allows us to incorporate known short-term developments whilst also incorporating long-term trends. The long-term trends, with some uncertainties, are based on fundamental known factors. The current generation fleet (e.g. Airbus A320s and Boeing 737 NGs) are no longer in production, and will be retired from commercial passenger fleets in the next 10-25 years. They will be replaced by the in-production next generation aircraft types (e.g. Airbus A320neos and Boeing 737 Max).

4.9 How quickly this transition happens depends on a number of factors, but fundamentally it is a question of age. The average age of the active current generation fleet of Boeing 737s is almost 11 years33 in Europe, and in just 10 years (i.e. by 2030) over half of this fleet will be over 20 years old. Most passenger airlines will look to retire aircraft when they reach 20-25 years old.

32 By way of comparison, the DFT Fleet Mix Model relies more heavily on high-level transition curves rather than incorporating individual airline orderbooks 33 Source: CAPA Fleets: European commercial passenger operators only, as of December 2019

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Low Cost Carriers tend to operate younger, more efficient fleets and are likely to retire aircraft from their fleet earlier. This is reflected in the average ages of European airlines – the average age of the narrow-body fleets of the top European legacy carriers is almost 14 years34, while the top European LCCs operate fleets that are, on average, only 8 years old35.

4.10 By way of an example, the current generation Boeing 737s entered service in the late 1990s and have gradually replaced the previous generation (Boeing 737 “classics”). In 10 years, the Boeing 737 NG share was 63%36, after 20 years (i.e. today) the share of Boeing 737 NG is 92%37.

4.11 We forecast a similar transition curve, such that by 2032 (12 years after production stopped for the current generation) the proportion of passenger narrow body jets that are next generation aircraft is 66%.

4.12 The delays to the Boeing 737 Max program were described in paragraphs 4.1.13 to 4.1.16 of the ESA and were incorporated into the ESA forecast fleet mix assumptions. As explained in the ESA, we forecast Ryanair to receive its first Boeing 737 Max in 2022 (an assumption that may prove conservative in light of recent developments discussed in the next paragraph), and we expect the airline to replace the majority of its existing fleet over the following 10-15 years. Given the importance of fleet mix to the environmental assessment we have provided more detail on our expectation of the Ryanair fleet evolution in the following paragraphs.

4.13 For the reasons set out in the ESA, we believe that the delays to the Max program will only delay the short-term transition, but do not change the longer-term requirements for replacement aircraft for the airline. Further, the assumptions we made regarding the timetable of deliveries have been largely supported by recent developments. In November 2020, the US Federal Aviation Administration (FAA) rescinded the order that grounded the aircraft and published an Airworthiness Directive specifying changes that must be made prior to the aircraft returning to service, effectively clearing a way for the aircraft to return to commercial service by the end of 2020. EASA (the body responsible for certifying the aircraft in Europe) has since published its own proposed Airworthiness Directive and has launched a 28-day consultation – commentators expect a return to service in Europe in Q1 2021. Ryanair have also reported that they anticipate taking delivery of 30 Boeing 737 Max jets before the peak of summer 202138.

4.14 As at December 2019, the Ryanair group had a fleet of almost 450 Boeing 737-800 aircraft39, with an average age of 9 years old. The age histogram is presented below and demonstrates that by 2032 almost 60% of the airline’s current fleet will be facing retirement. This suggests that the airline will need to replace at least 60% of its current fleet just in order to serve 2019 traffic levels. Presuming that the airline will continue growing once the industry has recovered

34 Source CAPA Fleets as of November 2020, based on the average age of narrow-body jets operated by Air France, British Airways, KLM and Lufthansa 35 Source: CAPA Fleets as of November 2020, based on the average age of narrow-body jets operated by easyJet, Norwegian, Ryanair and Wizz 36 Ibid, as of December 2010 37 Ibid, as of December 2019 38 Source: https://www.flightglobal.com/airlines/ryanair-looks-beyond-hard-winter-towards-737-max- arrival/140913.article 39 Source: CAPA Fleets: Ryanair group includes Ryanair, Ryanair UK, Malta Air, Buzz

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from the current crisis, they will require many more aircraft, increasing the share of next generation aircraft further.

Source: CAPA Fleets database, Boeing 737 fleet only

4.15 Ryanair’s commitment to the Boeing 737 Max and further evidence of its intentions regarding fleet transition were demonstrated in its recent announcement40 that it has purchased an additional 75 Boeing 737 Max aircraft – the first major order since the grounding of the Boeing 737 Max fleet. This brings their total order backlog to 210 aircraft, all of which are anticipated to be delivered between 2021 and 2024.

4.16 In summary, we believe that our forecast of 66% next generation share is a robust and, if anything, conservative assumption.

40 CD 14.63 Ryanair Announcement 3rd December 2020

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5 RESPONSE TO SSE

Explanation of forecast methodology (paragraph 3.2 of SSE Statement of Case)

5.1 Section 3 provides a description of the methodology employed. In addition, we have responded to detailed data requests from SSE and provided key input variables and assumptions related to the traffic forecast model.

Comparisons to DFT Forecasts (paragraph 3.1 of SSE Statement of Case)

5.2 SSE compare the ICF / MAG forecasts with those provided by the DFT in their 2017 UK aviation forecast.

5.3 The DFT produce regular national aviation forecasts using their proprietary aviation forecast model. The last forecast was made in 201741 and used 2016 as a baseline year. Aside from the fact that the forecasts are 3 years out of date, the Department themselves caution against using the detailed yearly data beyond the national and strategic purpose it was created to support, stating that “we are confident in our forecasting of aviation demand at the national and regional level stemming from the economic drivers” 42. They highlight the importance of short-term drivers and local factors, particularly in situations where there are overlapping catchments and high levels of competition. They note that “Airport allocation can be affected by a broader set of short-term drivers that our model doesn’t account for and was not designed to pick up” 43, and as a result, in such situations they recommend “the use of alternative forecasts or sensitivities (for example, alternative local forecasting) be considered alongside the Department’s forecasts, particularly ones that contain and examine short-term drivers of demand” 44.

5.4 Stansted Airport certainly meets the conditions of a highly competitive, overlapping catchment. The explanatory note also explicitly mentions long-term commercial deals between airlines and airports as an example of the kind of short-term factors that it is not designed to incorporate. This is another feature of Stansted Airport, following its publicised long-term deals with Ryanair, Jet2 and easyJet. In summary, the Department have themselves advised against relying (solely) on their forecasts for situations such as Stansted’s.

5.5 Moreover, the model’s shortcomings at airport-level short-term forecasts are amply demonstrated in the Department’s 2017 forecast for Stansted Airport. In the Baseline Central scenario, the Department forecast Stansted to achieve 22.5m passengers in 2019, 5.6m (20%) lower than actual throughput for 2019. In the same scenario, Stansted doesn’t reach 28m until 2028 – 10 years later than in reality45.

5.6 Beyond the local factors that are not captured by the Department’s model, there is another fundamental area where we believe the Department’s model does not fully represent the realities of the London aviation market. The Department’s model treats low cost carrier

41 CD 14.14 DFT UK Aviation Forecasts 2017 42 CD 14.66 DFT UK Aviation Forecast 2017 Yearly Airport Data – Explanatory note 43 ibid 44 ibid 45 Stansted first achieved volumes of 28m in 2018

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passengers and “other” passengers as two distinct markets, which has implications for how London passenger demand is allocated and (upon application of capacity constraints) re- allocated between the London airports. This approach means that passenger demand that has historically flown on “full-service” airlines will never consider “low-cost” services at other airports. In our experience, passengers are not so easily differentiated and will consider the type of airline as one of many other factors (e.g. timing, convenience, price). This directly impacts how much of the London demand in the Department’s model can utilise Stansted (predominantly served by “low-cost” carriers).

5.7 Finally, despite the issues noted above, it is worth remembering that, in terms of the top-down economic demand forecasting, there are a number of similarities to our own approach. The structure of the national air passenger demand model is much the same as the ICF London demand model, establishing relationships between market segments and income and price factors. As a result, the ICF London demand forecasts imply similar growth rates to the unconstrained London catchment forecasts in the Department’s 2017 forecasts (see Section 4.3 of the ESA for more details).

Cargo forecasts (paragraph 3.3 of SSE Statement of Case)

5.8 SSE describe the forecast growth in cargo tonnage and CATMs as ‘surprising’ and ‘optimistic’. As described in paragraph 3.19, while the growth at Stansted forecast over the next 12-14 years is significant, it represents only a small fraction of the overall freight market to/from London. Moreover, there are a number of factors and underlying trends that support a growth story at Stansted.

5.9 Stansted benefits from a robust, diverse cargo customer base, serving both dedicated freighter forwarders (for example Lufthansa Cargo - these are dedicated freighter services that transport cargo for third parties) and integrators (for example DHL, who provide a door-to-door service).

5.10 The freight forwarding model is the traditional one, used by the major scheduled airlines (both passenger and cargo). These carriers use both the cargo capacity in the holds of passenger aircraft as well as dedicated freighter aircraft. With limited space to grow at the two main long- haul airports in London (Heathrow and Gatwick), this will provide opportunities at Stansted airport, which is the only other London airport with the infrastructure to accommodate long- haul services.

5.11 Stansted is served by all three of the major integrators (Fedex, UPS and DHL). Further, it is the only London airport served by Fedex and UPS (DHL have operations at both Heathrow and Luton). Stansted serves as a key gateway to London and the UK for both Fedex (Stansted is its largest UK base) and UPS (Stansted is its second largest base, after East Midlands). The express freight integrators provide value-added, door-to-door transport and deliveries of next-day or time-definite shipments across the world. The type of goods that are transported by the express freight operators are typically small individual packages that are high-value and low weight, such as electrical components, small machine parts, documents, pharmaceutical and medical products. These are goods that need to be transported quickly. The express freight operators have simplified and accelerated the process of transporting small packets across the world and they provide their customers with easy collection and delivery along with sophisticated tracking

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systems. The key part of their business model is to bring speed and certainty of collection and delivery to the customer. The continuing growth of e-commerce and express delivery services will drive growth in this segment, for which Stansted provides a vital gateway to the London and South East market. Beyond the three traditional integrators, Amazon are starting to enter the air freight market and have established their own cargo airline, Amazon Air. Amazon Air are growing with a current fleet of 64 aircraft and expected to be some 200 aircraft by 2028.

5.12 The type of operator also has implications for the characteristics of the flights. Dedicated freighters have a larger component of long haul, and as such tend to employ larger aircraft, though more than 50% of flights are on narrow-body aircraft types. By contrast, the vast majority of the integrator market is served by narrow-body aircraft types predominantly connecting Stansted to their European hubs.

Fleet Mix (paragraphs 3.1 – 3.7 of SSE Statement of Case)

5.13 The impact of the Boeing 737 Max delays in discussed in detail in paragraphs 4.7 - 4.14 above.

6 Conclusions

6.1 The traffic forecasts provided by ICF in support of the 2018 ES and the 2020 ESA are derived from a robust model employing industry best practice methodologies to project aviation demand based on independently sourced income and price variables. The Covid-19 pandemic necessitated a significant revision to the 2018 ES forecasts, with the addition of a ‘Covid-19 overlay’ to reflect industry expectations for the initial impact and recovery profile. Otherwise, the basis of the 2020 ESA is the same model as the 2018 ES, with updated inputs.

6.2 We have responded to challenges on the robustness of our forecasts in the face of the ongoing Covid-19 pandemic. Whilst this is an un-precedented crisis for the aviation industry – reflected in the 4 year delay implied by our revised ESA forecasts – we remain confident that, in time, demand for air travel will return and that Stansted, with its dynamic and financially robust airline base, is better placed than many to lead the recovery. In the longer term, the airport’s strong fundamentals - its large and vibrant local catchment, its access to central London and the capacity constraints at other London airports – remain as true post-pandemic as they were before. Given the opportunity to grow beyond its current limit of 35mppa (forecast to be achieved in 202746), our forecasts project Stansted to reach 43mppa in 203247.

6.3 We have also addressed comments surrounding the Boeing 737 Max and its implications for our fleet mix forecasts. The grounding of the Boeing 737 Max fleet that occurred after the 2018 ES was incorporated into the 2020 ESA, where we delayed the entry into service of the Boeing 737 Max at Stansted to 2022. Following certification by the FAA, it now seems highly likely that EASA will follow and the aircraft will enter operation at Stansted some time in 2021, as indeed Ryanair

46 Covid Base Development Case, 2020 ESA 47 Covid Base Development Case, 2020 ESA

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have also reported. We have also presented evidence to support the over-arching fleet transition profile which will see a large proportion of the current Boeing 737 and Airbus A320 fleet replaced with next generation aircraft in the next 10-15 years. This is an inevitable consequence of the age profile of the existing fleet and is reflective of similar transition profiles witnessed when the current generation of aircraft was introduced in the late 1990s.

6.4 We also explain why comparisons to the 2017 DFT forecasts are inappropriate. Not only are these forecasts now 3 years out of date, they are also demonstrably inaccurate in the case of Stansted (in their base case forecast, Stansted does not reach its actual 2019 traffic level of 28mppa until 2028). Moreover, the Department themselves caution against using the granular airport-level forecasts due to local, supply-side factors that their national-level model does not, and cannot, capture.

6.5 Finally, we outline the case for growth potential in the cargo market. Stansted is already a significant airport in the freighter market, being the second largest airport in the UK for freighter activity based on CATMs (behind East Midlands). Moreover, it has a diverse cargo airline network comprising dedicated freighters and integrators. Aside from being one of the few options in the London market with available capacity for cargo airlines, the continuing growth in online-shopping and express delivery services will provide growth opportunities for integrators, for which Stansted will form a key gateway into London and the South East.

6.6 In summary, we are confident that our air traffic forecasts are based on a robust, defendable methodology. A lot may have changed between the 2018 ES and the 2020 ESA, due to events that no-one could have predicted, but the underlying factors that make London the largest aviation market in the world have not changed and we are confident that demand for air travel to/from London will recover, as it has countless times before.

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