Market pricing solution to pressure on Heathrow

Who owns the slots at Heathrow?

HACAN (Heathrow Association for the Control of Aircraft Noise) today called upon both leading political parties to take up its constructive proposals for solving the problem of pressure from airlines to obtain access to Heathrow Airport. HACAN’s policy document, published today, proposes that market pricing for take-off and landing slots be introduced, either through slot auctions or by market-based airport charges set by a new independent regulator: OFAIR.

HACAN argues that when Heathrow and the other South East Airports were privatised the true value of Heathrow slots was not properly appreciated and the question of who owns the slots was not addressed. This vacuum has been filled by the airlines who assert that their so-called ëgrandfather rights’ give them property rights over the slots they are currently allocated. Robert Ayling, British Airways’ chief executive, recently said that for the airline to be required to give up any of its slots would be:

“wrong, irrational, unfair, potentially corrupt and against the public interest.” (FT 30th August 1996)

Slots are a public asset

HACAN argues that, on the contrary, Heathrow slots are a public asset and that the public interest requires that all airlines should pay a licence fee for both existing and any new slots of at least the price which they would command in an open market. This is how other valuable scarce national assets such as broadcasting frequencies are allocated.

In fact, under such a system, efficient and profitable airlines such as British Airways could expand their operations at Heathrow, by bidding for slots currently held by inefficient operators, without any negative environmental consequences. HACAN proposes that an environmental limit is set on available slots at Heathrow of 450,000 a year, the maximum capacity under current operating procedures, which will be reached by the year 2000.

HACAN estimates that market pricing at Heathrow would raise between £250m and £500m a year for the public purse. HACAN argues that the current system of cross-subsidy whereby part of the massive returns BAA makes from its monopoly retail operations are used to cross-subsidise airport charges for airlines is squandering substantial revenues which rightly belong to the public.

The subsidy to airport charges at Heathrow creates a destructive web of distortions including:

  • the perverse result that airlines pay half as much to use Heathrow Airport as they do to use smaller foreign airports, such as Frankfurt, or UK domestic airports, such as Newcastle (Heathrow charges are 60% of those at Manchester or Glasgow)

  • the economic lunacy of cutting charges to use Heathrow despite the fact that the airport is full to overflowing, while charges at underused alternatives such as Stansted are increased (the recent MMC review recommends charges should be cut at Heathrow annually by RPI-3 and increased at Stansted by RPI+1)

  • rather than airlines paying for the pollution they cause when using an airport which requires them to overfly the capital, they are incentivised to do so by large state sanctioned subsidies

Benefits of market pricing

Open market pricing at Heathrow would introduce numerous benefits:

  • the public would receive part of the economic benefit from the use of what are probably the most valuable landing slots in the world

  • the public would receive part of the economic benefit from the profits made from the country’s most valuable retail monopoly: BAA’s ownership of all retail space at Heathrow and the other London airports

  • market prices would bring supply and demand at Heathrow into balance, ending excess demand from airlines for slots

  • the price mechanism would do its correct job of ensuring valuable assets are used efficiently – those airlines which best met customers’ needs would successfully bid for slots, many of which are held historically by inefficient operators

  • the UK could lead the world in adopting ëopen skies’ policies and demonstrate its commitment to putting the needs of citizens ahead of airline ëproducer’ interests

Need for new independent regulator

As part of this new structure, HACAN is also calling for the regulatory system applied to Heathrow to be reformed and the 1986 Airports Act to be replaced. Currently Heathrow’s economic regulator, the CAA regulates the airport only to meet the interests of airlines and passengers, the majority of whom are foreign. By law, the CAA cannot consider the environmental interests of London and over half a million UK residents directly affected by the airport. (See letter from the Head of Regulation at the CAA, attached, confirming this.)

Airlines support market in Heathrow slots — on their own terms

British Airways and American Airlines are now publicly supporting open-market trading of Heathrow slots, as part of their bid for approval of their transatlantic alliance, but on terms that they keep the sale proceeds. This supports our case that there would be no serious practical problems with open market government slot auctions. In fact, a black market already exists in Heathrow slots, endorsed by the CAA, whereby airlines do sell some of the slots they are allocated at no charge and keep the proceeds. But when did the government hand over free of charge to British Airways and American Airlines, or Lufthansa, Air France and Iberia, and their shareholders, many of them foreign states, permanent property rights to land at the capital’s major airport?

Dermot Cox, HACAN Chairman, said:

“It is ten years since Heathrow Airport was privatised as the only monopoly utility without a policy to create competition and encourage market forces. We can now see the inevitable distortions which result from letting the state determine prices in a commercial market, combined

“with a regulator which is required to ignore the public interest. Both major political parties now profess their commitment to keeping out of industry and allowing markets to operate. But the substantial economic surplus from operating the world’s busiest international airport is being used to subsidise airlines instead of being channelled into the many far higher priority areas where public funding is required. At the same time the huge stimulus from subsidised airport charges is leading to pressure for expansion at the airport which is already destroying the quality of life in large parts of London.

“British Airways can afford to pay its way at Heathrow. So should the many foreign airlines which use the airport. Now is the time for the Government to assert its rights over Heathrow’s slots, value them properly and obtain a fair share of that value for the public.

“At the same time we need a new independent regulator, OFAIR, to handle the South East Airports. Heathrow Airport is the largest single source of pollution in London. It is scandalous that the airport is regulated solely to meet the needs of airlines and passengers. The airport must also be regulated to take into account the national interest and the interests of the UK residents whose lives it affects.”

For more information please contact:
Dermot Cox, HACAN Chairman, on: 0181 392 2996
or Gideon Nellen, co-author, on: 0171 499 8122

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