Expanding Airport Capacity: Competition and Connectivity The case of Gatwick and Heathrow Country-Specific Policy Analysis Expanding Airport Capacity: Competition and Connectivity The case of Gatwick and Heathrow Country-Specific Policy Analysis THE INTERNATIONAL TRANSPORT FORUM The International Transport Forum at the OECD is an intergovernmental organisation with 54 member countries. It acts as a strategic think tank with the objective of helping shape the transport policy agenda on a global level and ensuring that it contributes to economic growth, environmental protection, social inclusion and the preservation of human life and well-being. The International Transport Forum organises an Annual Summit of ministers along with leading representatives from industry, civil society and academia. The International Transport Forum was created under a Declaration issued by the Council of Ministers of the ECMT (European Conference of Ministers of Transport) at its Ministerial Session in May 2006 under the legal authority of the Protocol of the ECMT, signed in Brussels on 17 October 1953, and legal instruments of the OECD. The Members of the Forum are: Albania, Armenia, Australia, Austria, Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Canada, Chile, People’s Republic of China, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Former Yugoslav Republic of Macedonia, Georgia, Germany, Greece, Hungary, Iceland, India, Ireland, Italy, Japan, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Republic of Moldova, Montenegro, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Russian Federation, Serbia, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom and United States. The International Transport Forum’s Research Centre gathers statistics and conducts co-operative research programmes addressing all modes of transport. Its findings are widely disseminated and support policy making in Member countries as well as contributing to the annual summit. Further information about the International Transport Forum is available at www.internationaltransportforum.org This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Acknowledgement The analysis for this report was undertaken by SEO Economic Research. The SEO team comprised Guillaume Burghouwt, Joop Krul and Jan Veldhuis together with external advisors Jaap de Wit (University of Amsterdam) and John Jamotta (former VP Network Planning at Southwest Airlines). SEO Economic Research carries out independent applied economic research on behalf of the public and private sectors. SEO Economic Research is affiliated to the University of Amsterdam, giving it access to the latest scientific research tools. Operating on a not-for-profit basis, SEO continually invests in the intellectual capital of its staff by arranging for them to pursue graduate studies, publish scientific papers and participate in academic networks and conferences. TABLE OF CONTENTS – 7 Table of contents EXECUTIVE SUMMARY ......................................................................................................................... 11 Factors affecting airline behaviour .............................................................................................. 11 Airline responses as a result of adding capacity at Gatwick or Heathrow ................................... 12 Impact on the “competitive outcome”.......................................................................................... 14 Likelihood of the airline responses .............................................................................................. 15 1. INTRODUCTION .................................................................................................................................. 17 1.1 Background and objective of the study ........................................................................................ 17 1.2 Our approach ................................................................................................................................ 18 1.3 Follow up work ............................................................................................................................ 18 2. AIRLINE BUSINESS MODELS AND SEGMENTS ........................................................................... 19 2.1 Business models for different airline segments ........................................................................... 19 2.2 Legacy/ network carriers: the home-based hub carrier ................................................................ 20 2.3 Other legacy/ network carriers ..................................................................................................... 25 2.4 Low-cost carriers.......................................................................................................................... 27 2.5 Leisure carriers ............................................................................................................................. 31 2.6 Cargo operators ............................................................................................................................ 31 3. THE LONDON AIRPORTS SYSTEM ................................................................................................. 33 3.1 The London market ...................................................................................................................... 33 3.2 Heathrow ...................................................................................................................................... 37 3.3 Gatwick ........................................................................................................................................ 40 3.4 Stansted, Luton and Southend: low-cost, point-to-point leisure services .................................... 41 3.5 City: point-to-point business services .......................................................................................... 41 3.6 Future capacity requirements ....................................................................................................... 42 3.7 Key conclusions on the London airports system .......................................................................... 42 4. RELEVANT FACTORS IN AIRPORT CHOICE FOR AIRLINES AND OTHER USERS ................. 45 4.1 Factors driving airline behaviour ................................................................................................. 45 4.2 Market size ................................................................................................................................... 45 4.3 Advantages of spatial concentration of the network .................................................................... 47 4.4 Market access and airport capacity .............................................................................................. 50 4.5 Visit costs ..................................................................................................................................... 51 4.6 Congestion costs .......................................................................................................................... 54 4.7 Airport facilities and service level ............................................................................................... 54 4.8 Summary of driving factors ......................................................................................................... 55 4.9 Positive feedback loop between connectivity growth and user behaviour ................................... 56 4.10 Performance of the London airports with respect to the airline drivers ....................................... 57 4.11 Key conclusions on factors that drive airline and user behaviour................................................ 59 EXPANDING AIRPORT CAPACITY: COMPETITION AND CONNECTIVITY © OECD 2014 8 – TABLE OF CONTENTS 5. AIRLINE RESPONSE FOR DIFFERENT CAPACITY EXPANSION OPTIONS ............................. 61 5.1 Introduction .................................................................................................................................. 61 5.2 Airline responses .......................................................................................................................... 61 5.3 Expanding Heathrow .................................................................................................................... 63 5.4 Expanding Gatwick ...................................................................................................................... 69 5.5 Evaluating the competitive outcome of the options ..................................................................... 75 5.6 Key conclusions regarding airline responses and competitive outcome ...................................... 81 6. LIKELIHOOD OF AIRLINE RESPONSES ......................................................................................... 83 6.1 Introduction .................................................................................................................................. 83 6.2 The Airports Commission forecast and scenarios ........................................................................ 83 6.3 Likelihood of the airline responses .............................................................................................