Written evidence from London Oxford Airport (SMA0003)

This document identifies the position of London Oxford Airport relative to the questions raised in the Transport Committee’s new inquiry – Smaller airports.

Executive Summary

London Oxford has in the last 7 years has followed a strategy of establishing the location as  major supporter of business aviation for southern England  in addition  to  its historic function  of providing  base airport facilities for the premier global  airline pilot training school, Oxford Air Training.

By definition London Oxford falls into the category of smaller airport. For the short and medium term future, it believes it has a role in expanding its strategy beyond the current focus; thereby responding to community needs to properly establish UK domestic and near European destinations airline operations. The revised strategy will focus to deliver this objective. This would provide more efficient mobility benefits and sustainable air travel for the population of Oxfordshire and additionally have some effect on alleviating the capacity constraints at Southern airfields over the next 10 years and beyond (currently researched and debated by the Airports Commission).

Smaller Airports meeting the needs of the community and the impact on regional economic development.  London Oxford Airport’s current  status  and near future  strategy

Airports provide mobility and sustainability improvements for local populations. Additionally, it can be witnessed that airports act as catalysts in encouraging business investment in surrounding areas, providing employment and local wealth creation. Airports provide direct employment and the nature of airport operations necessitates the need for many of those employees to have high skills base.

The established Oxford Airport infrastructure supports approximately 20 third party employers (all aviation related) which in turn employ some 1000 staff on site. They in turn indirectly use and support numerous local businesses, SMEs and skilled employment in the local area (within approximately 35 miles). A smaller airport has a  beneficial effect beyond this, where SMEs, companies and firms are induced to start up, or relocate and expand as a result of an airport offering services for the corporate sector generally.

Because of historic development and with some infrastructure constraints (limited runway length and terminal facilities) this airport developed initially as a business aviation facility.

With a large community need for airline services identified by the UK CAA, a change in strategy provides the opportunity to also now meet the needs of the community in terms of providing scheduled air transportation solutions for business and leisure needs. However delivery of this strategy will not be without significant financial, operational   and competitive hurdles.

Access to affordable and local air travel provides mobility for the local population. It reduces surface transport distances and associated pollutants if air transport from more distant departure airports can be replaced by services from a local regional departure point.

The Oxford airport business model will evolve in mind of the needs of the community.

London Oxford Airport  has a recent strategy of developing  facilities to  support the Business Aviation  sector  and has successfully achieved  a role in this market  with  average movements  comparable with Biggin Hill and Farnborough.  A fleet of 30 + Business Aviation aircraft based at Oxford supports the needs of local industry sectors.  Within that fleet, some 30% of aircraft are registered to business locations with London postcodes. In effect the airport already supports the needs of London- based senior corporate travellers.

The airport now has a revised strategy to develop ‘niche’ scheduled services. With the established infrastructure it can target domestic and near European destinations within a flying radius of 90 minutes. This typically allows focus on Scottish and Irish domestic destinations as well as Amsterdam, Paris, Frankfurt and similar European destinations. All destinations have a significant demand from the travelling corporate sector and thus the focus will be delivery of services that support primarily this sector.

Oxfordshire as a county sees an annual air transport activity of 2.1 million sector air passengers (UK CAA derived statistics). This is a significant county travel demand.  Without the development of scheduled air services from Oxford, all this traffic spills primarily to Heathrow, Birmingham and to a lesser extent Bristol and Luton.

This is inconvenient for the local community and increases the road congestion/carbon emissions resulting from longer surface transport supporting journeys to these more distant departure/arrival points.  The near future availability of a limited range of services from Oxford to those destinations mentioned would alleviate considerably the surface transport congestion and carbon emission issues. Further it would provide significant improvements in convenience and mobility for the local population. The airport has  an existing infrastructure that  moving forward  can alleviate the  constraints on  population  mobility and also provide some alternative airline solutions caused  by the  lack of future route development opportunities  at the 2 major southern airports. Oxford is in the final stage of negotiating services to Dublin and Edinburgh which should launch end 2014. However the operation of these routes is not without financial risk associated with the early stages of a route commencement where costs are high and early revenues low.

Issues around competitiveness, rationalization and commercial viability affecting smaller airports, including the importance of smaller airports in serving niche leisure and business markets, and flight training and education ('general aviation') and providing dedicated capacity for cargo services, and the role that partners and airlines play in the delivery of such services

London has significant attraction/commercial advantage as the Capital city.  It is a major UK/Global financial centre and a head office location for many UK businesses and European headquarters for many overseas organisations. As a result, the volume demand for higher yielding seats – corporate travel – across many destinations together with the capital being the major focus for incoming leisure tourism allows many London air routes easier paths to viability. Air transport policies and priorities that date back to the 1950s have ‘preferred’ Heathrow as the major UK departure/arrival point for air travel.  Regional operations as a result have not had these historic advantages and growth has been compromised as a result. 

To address the area of imbalance, central government assistance/incentives to assist developing airports  should fall into 2 main areas - Airport use   and airport infrastructure.

Dedicated cargo facilities

Air freight particularly small package delivery services organised by specialists including DHL   FEDEX etc.  is organised around speed of delivery, requiring transportation overnight thus requiring the night availability of supporting airports. Many small airports will operate with community restrictions restricting night time operations (as in the case of Oxford). Others will close overnight for financial reasons, in order to limit operational costs.  For these reasons, most small airports cannot enjoy the financial benefits of supporting small package freight operations.

However the close proximity and convenience of a small airport to local manufacturing facilities, high end technology, medical, automotive and research sector firms and industry, does provide opportunity for small airports to benefit from an alternative freight type- priority (Just in time) freight activity.  These are freight deliveries made to a single customer, using smaller pure freight aircraft to ensure local production lines remain operational.  The critical time delivery of these components is fundamental   and thus short onward surface delivery distances is the major consideration.  Oxford is already significantly supporting this important niche - just in time freight recognises and responds to the diverse European locations of sub assembly manufacturing and the difficulties of component delivery to final assembly site. Critical time freight supports the uninterrupted operation of production lines for local final assembly manufacturing.  

Central government can assist the development of the small airport in several ways and in mind of London Oxford Airport:

From a pilot training perspective.

The UK is the only European state which continues to levy VAT on pilot training. A large proportion of pilot training is now self-funded and thus individuals are far less able to recover this VAT.  Traditionally the UK has been at the forefront of pilot training to  satisfy the global demand for air transport pilots. This large additional cost has ensured much migration of this aviation training to other European and wider global   locations. It has significantly reduced the runway movements resulting from pilot training at Oxford with the associated loss of income to the airport.   To address this anomaly would be attractive for the pilot training establishments in the UK and their supporting airports.

From a Business aviation perspective

There is increasing use of MOD airfields   for the purposes of supporting civil aviation. This is stated to be a central government policy aimed at increasing the commercial use of these assets to justify their continued presence in order to offset the declining traditional use.

As an example, civil aviation now accounts for at least 80% of RAF Northolt’s movements.  Clearly business aviation’s use of an airfield is largely motivated by customer convenience and there is no doubt that Northolt has a high convenience factor for the central London area. However, UK civil airports are highly (and rightly) regulated by EASA and in turn by the UK CAA.  This regulation seeks to deliver high levels of safety for customers but it comes at considerable cost for the civil airfield. The airside infrastructure needs are onerous in order to meet published standards and provide the required levels of safety for the airport users. 

Under the current approach of the UK military, different and less stringent safety standards are required of an MOD aerodrome than by the CAA of a civil aerodrome, even if by far the highest proportion of air traffic landing and taking off from a military aerodrome is civil. This is the case at Northolt. Civil aircraft are permitted access against those different and in important cases less stringent military safety levels (such as in relation to RESAs – Runway End Safety Areas, required at every aerodrome with an instrument approach, for overrunning and undershooting aircraft). Additionally, the infrastructure and its total cost are provided against traditional military use of the aerodrome. There is no requirement for the civil element of MOD aerodrome use to fully cover its proportionate share of the operating costs of the aerodrome. Thus, the total charges for its civil use could significantly undercut those of a nearby civil airfield, where all costs of operations must be met by the civil aircraft operators in order for the business to be viable. In order to balance these conflicting issues, there needs to be either rebating of regulatory costs where  civil airfields are adversely affected by near MOD airfields; alternatively a dual regulatory approach to MOD airfields should be adopted where significant commercial use overlays the traditional MOD use of military fields. Civil use of the airfield would be subject to UK CAA regulatory minimums and would be charged at commercial levels that covered the proportion of costs in full of the civil use of infrastructure.  

From an air transport perspective  

Taxation through the APD is particularly onerous in the UK.  UK APD ranks as one of the highest globally. It is even more critical in the area of UK domestic   air travel where each sector of the return journey is taxed. This can result in the taxation element of the cost exceeding the airlines’ purchase costs for the ticket. For a small airport, the introduction of domestic services more often forms the core of early transport operations and thus this taxation issue represents a significant hurdle and barrier to customer product acceptability.

As example an early Oxford scheduled service operation operated with a size of aircraft (19 seats) exempt from early APD. The revision of the APD rules subsequently   included this category of aircraft which resulted in the operating airline concluding that the routes in question   could no longer be viable. These services ceased with the loss of local supporting employment, airport income   and the loss of mobility for the population.

The more recent (2014) reductions in certain APDs have provided no benefit for the small airport.  The witnessed APD reductions have only related to long haul sectors- a market in which no small airport has involvement.

Relief of this burden on short haul domestic and near European destinations for small airports- perhaps for an introductory fixed period would encourage early adoption by operators and lead to earlier route viability. 

Actions central Government is taking or could take to support smaller airports and aid diversification to ensure their longer-term viability

The role of local authorities and Local Enterprise Partnerships (LEPs) - Ensuring smaller airports improve connectivity.

Funding and taxation issues

London Oxford Airport is privately owned and to date, infrastructure development costs have been met from internal sources. Airport development projects are typically runway works, terminal expansions and high tech infrastructure additions. All tend to be ‘large numbers’ projects.

Recent clarification  by  the EU  has at least identified  the method  by which  local government may provide funds to support infrastructure developments  at the level  of the smaller airport without falling foul of any  state aid  ‘no go’ areas. This of course does not guarantee that such funding exists. It is merely an agreed process that allows consideration of such an application. Such funding has previously not been available to Oxford Airport and I doubt that any reserves have been held for this purpose at LEP level for this financial year.

In terms of  meeting the financial  needs , infrastructure costs  relative to  turnover  are high at the smaller regional  airport – basically  the  need to  provide safe  aviation  movements  both  in the air and on the ground  within the airport  boundary and air traffic zone are the  same whether for a 10 million passenger per year airport  or a smaller   airport . Similar levels and standards of equipment and trained manpower requirements are required, the cost of which in the case of the smaller airport is spread across a much smaller customer base.

Small airports will have less internal funding available to them to properly develop necessary infrastructure.  The access to funding assistance via LEP sources is thus a vital element of small airport development. LEPs should treat this funding assistance with the same weighting that would be appropriate for assisting new corporate business attraction into a region.

Central Government support

Central government  needs to  actively encourage  local  government/LEP  to  recognise the  contribution  to   population and business wealth/ employment generation/ community mobility  that  a local regional airport  brings. It needs to encourage LEPs to allocate funding in line with EU infrastructure aid rules. Additionally it should encourage a funding process with the least administrative hurdles. Further it needs to define timescales for the process, whilst acknowledging that funding of such infrastructure projects requires necessary checks and balances to ensure appropriate funding use.  Infrastructure improvements require fairly swift implementation where there is need to   respond to market demand and business opportunity.   Timescales for consideration/approval of funding should therefore recognise this, perhaps with an agreed time limit for the completion of such an application process thereby mitigating the opportunity for process ‘drift’. 

Local Enterprise Partnerships have specific and detailed knowledge regarding  business existence   and proposed business activity within specific territorial regions.  Success of any air transport operation  results from  product awareness   at the point of purchase. LEPs  have  a role to   play in  supporting that product knowledge distribution  at least at the commencement of  any  service . LEPs can further indicate future destination   needs resulting from early stage discussions with prospective new businesses.

Airports’ connectivity and capacity-general

In the absence of any major climatological disruption, warfare dispute, aero political change in direction, the use of air transport for the purposes of population mobility will increase unabated over the next 40 years.

This growth in demand will be more relevant in the leisure sector and the rate of growth will vary in mind of global regional economic growth and levels of affluence. Further the forecast growth suggests a bias towards greater growth in air travel utilising low cost carriers.  It is likely that short/medium term, the low cost model will dominate across European and domestic services as air travel continues to become less a luxury purchase and more a commodity purchase. This will see the traditional ‘legacy’ carriers adapting their products to maintain price competitiveness with established Low cost carriers, reducing   costs and aligning themselves towards the low cost product.

Heathrow has adopted a strategy to date of focus on legacy carriers and markets, being unaccommodating towards the low cost sector. Slot constraints will force the continuation of that strategy pending additional runway capacity availability.

The concept of the hub airport clearly has a benefit both to the airline operator and airport. It also offers benefit to the residents/users in the local territory around the individual airport.  However   for those outside the natural catchment of the airport in question, air travel via a hub represents a grudge purchase. These customers would far rather travel on a direct service from their local departure point, assuming it exists and with frequency, timing and tariff that fall into the acceptable range.

Air connectivity- Domestic

The critical nature of future free slot availability at LHR will see commercial pressures result in the further migration of LHR slots used currently for domestic route purposes to long haul international services. This pressure is driven by both the airlines and Heathrow owners.  In the absence of any ability to make available new runway slots prior any new runway availability, airport shareholders will expect further revenue improvements each financial year which can only come through the increase in passenger throughput at the airport per existing runway slot. The slot constraints at other UK airports are far less onerous than Heathrow. Therefore it is unlikely that routes or route frequency will be lost across regional domestic city pairs as a result of the requirement to use those slots for more lucrative purposes.

Infrastructure costs make the operation of smaller airports particularly challenging.

Small developing airports in many cases are overshadowed by more mature ‘near’ airports which already offer a greater range of airline destinations and greater frequency of operation   to those destinations.  This provides customer attractiveness even when set against the disadvantages of longer surface transport access time. This can significantly disadvantage the early stages of a less mature airport developing new scheduled services.

The infrastructure necessary to  provide  safe aviation operations (essentially the establishment of controlled airspace, RADAR , radio navigation aids, Licenced air traffic control,  specialist fire services and airfield security etc. ) at smaller airports, which  comply with the regulatory oversight requirements and acceptable levels of operational   support for  aircraft users  is generally comparable with larger airfields . However the costs of provision are spread across lower frequencies of use. This leads to either higher end user charges   or longer payback periods   to deliver necessary returns on investments. The option to impose higher end user charges further competitively disadvantages the smaller airport.

Especially across the wider airport sector, significant incomes- as much as 50% of total airport incomes are now derived from non-aeronautical areas – retailing, property leasing, car parking etc.  This requires a critical mass of passengers to provide attraction to third party retailers to establish such retail revenue generators. Thus some of these aren’t available as revenue streams to the smaller airport. This is particularly relevant within the airport category of 1 million pax per annum or less. Again this places the smaller airport at a disadvantage. The combination of lower aeronautical incomes, non-aeronautical incomes and high infrastructure costs (compared with its relative use) is that challenge for the smaller airport.

Smaller airports at an earlier stage of commercial maturity tend to attract smaller regional carriers operating smaller capacity aircraft. These inevitably see higher per seat operational costs which in turn require higher average seat prices to   allow profitability to be achieved. In order to achieve that, marketing focus on certain segments (for example the corporate sector which pays a higher seat price in return for booking flexibility) constrains the attractiveness of the services across all potential market segments. Leisure passengers will be deterred (through pricing) in order to allow the seat occupancy by corporate customers paying the necessary higher seat tariffs.

Local, regional, national and EU policy and regulations on the future of smaller airports, including policy on (a) air passenger duty, (b) route subsidies (e.g. use of public service obligations to maintain particular routes and other state aid, the Regional Air Connectivity Fund, etc.)

Meeting the needs of the regional economy

Lack of regional scheduled air services restricts the mobility of the local population and causes the population   long surface transport journeys to the nearest airports all of which are at least one hour distant. This is inconvenient for leisure travellers and wastes significant time for companies requiring their employees to travel by air in support of business needs.

Incentives that compensate for the infrastructure cost disadvantages that prevail at smaller airports.

Route development Funding

This central government project recognises the initial commercial difficulties of establishing viable passenger air services from developing UK airports. Whilst not a guaranteed fund for every route commencement, it will support those which identify long term self-sustainability beyond the initial start-up phase. 

This fund has significant importance to London Oxford. It will support the introduction of new scheduled services and help establish foundations of air transport services from the airport.

BUT--Announced in the 2014 Spring Budget, by September the DfT is yet to announce the agreed process for airports/airlines to apply for such support although the funding is available for 2014 route launches. Thus routes will be forced to commence without the fund in order to provide a best fit for any seasonality issues associated with each route.

Enhancing regional airport connectivity and ‘government intervention’

Excluding domestic routes serving London, air travel demand will exist between UK points where the connecting points are relatively mutually distant and where air travel provides   time saving at an acceptable relative cost compared with alternatives.

Example:

Doncaster –Edinburgh would not provide sufficient time or tariff advantage compared with East Coast Rail which delivers direct services between city centre locations within 3 hours and with a range of attractive tariffs matching the needs of both corporate and leisure traveller.

Whereas

Oxford –Edinburgh would provide a time advantage compared with the current 6 hours city to city rail time and with an acceptable tariff spread, would be viable with the travelling population requiring this city pair air connectivity.

Thus, where both convenience and tariff value fall in to the area of acceptability there would be no barrier to the continued organic growth of domestic air services. One Caveat to  this argument is presented by the double whammy  APD (applied to each sector of a domestic return journey)  which  generally disadvantages the viability of all domestic operations  and appears as a visible air travel tax  in comparison with rail competition which has no  visible travel tax.

Many EU states adopt an alternate policy compared with the UK in the area of APD, which sees significantly lower or even no air travel tax (APD). In comparison therefore the relative cost of mobility within the UK is significantly higher than in many other EU states.

Major options to support regional airports development

From an airport services competition point of view, there is value in identifying the real range of competitors that airports face and certain disadvantages that prevail for UK regional airports.

From a travelling customer point of view, common sense suggests that a regional airport has competition from   near peer airports that can offer competitive services to the required customer destination. Customer choice is based upon convenience and price.

However from an airport strategy and route development perspective all European Airports are competitors.  In the European  trading area, any licenced European air carrier can access any European city pair whether domestic or international and without reference to the carrier’s base country. Europe’s airlines have free access to any European city pair. There exist some 5000 unserved or underserved available European city pair routes with perhaps enough airline spare capacity across Europe to undertake 10% of them.

London Oxford airport is in competition with every European Airport to attract scarce airline spare aircraft capacity.  UK government approach to   passenger taxation and route support  incentives, relative to  other European governments   is yet another significant hurdle which the small airport  needs to  negotiate.

The attractiveness of a route relates to the cost of its operation and the potential for earning revenue in excess of the cost over the long term.

Critical to the decision making is the known loss incurred during the start-up phase of the service. Any way of mitigating this loss features large in that decision-making process... This is where non UK countries take the advantage.  In Germany and France, they take advantage of nominating ‘normal ‘ regional city pairs as requiring special support – effectively as the UK nominates PSO routes but those countries have a far more relaxed interpretation of the rules.  Thus UK airports/airlines fail to receive the same level of commercial support for starting UK routes. Thus the choice for any carrier is to commence a UK service with little or no commercial support /subsidy, or commence operations with a lower risk and cash flow issue in a mainland Europe location. The scarce resource of an available airline unit able   to choose between no assistance in the UK  or much more attractive less onerous  operational commencement from  other countries often results in success for the mainland Europe Airports.

Decision to operate is based on level of assistance in addition to route potential and UK airlines have already taken advantage with their units operating in France for example, where the decision to operate is based on the above options and benefits. UK airports have lost out as a result.

Where there is Europe wide  common regulation for  airports and air services development , there should be no  ability to interpret rules  which results in  certain countries  offering more favourable  support arrangements whilst disadvantaging others. Central  government should ensure  that for common agreements across Europe, a level playing field should exist .

There exists significant available runway and terminal infrastructure capacity across the UK. Regional airports have historically been disadvantaged, resulting from a combination of poor legacy legislative arrangements and lower levels of attractiveness compared with the Capital.  Some of the legacy issue even prevail today – example- the focus of UK scheduled services to China limited to London Airports- only revised in September 2014.

It could be argued that  temporary  preferential  commercial/taxation  arrangements for  regional airports  could assist  in making better use of  existing infrastructure  and in doing so assist  in drawing the customer base back to its  true point of origin. This would have the benefit of relieving Heathrow of a proportion of hub traffic which would prefer a local departure anyway thereby freeing seats for increased local use. These preferred arrangements  could  include  bi lateral preferential route arrangements for   regional airports ,  taxation holidays  linked to  the early stages of route developments, financial incentives for specific routes (maybe channelled through LEPs)where specific local business needs are proven(significant link requirements between local manufacturing  and remote supplier/sales/overseas manufacturing subsidiaries- etc.), and greater emphasis on non-Capital  tourism promotion  by the national tourist authority.

There is no doubt that successful airports have the ability to create positive micro economic geographic areas around them. The  biased aero political  support over many decades towards Heathrow  may have played  some part  in  creating  a south east centric spike in business opportunity and affluence  compared with other UK regions .  There appears no doubt that a solution that continues to ‘prefer’ a south eastern UK air transport focus with a single defined hub city will do little to address that greater economic re-distribution.

Summary

Regional airports have a significant role to play in satisfying the mobility needs of the population

Domestic UK services will continue organic growth where passenger volumes/time benefit /tariff advantage exists

The endorsement  by government  of temporary  preferential  commercial  arrangements for  regional airports  could assist  in making better use of  existing infrastructure  and in doing so assist  in drawing the customer base back to its  true point of origin.

The improved use of existing UK runway capacity would better use existing ( already paid for) infrastructure and improve the regional communities by more often offering them their first choice (local) departure point. This would have multiple benefits which would include   reduced surface transport times/emissions, and improvements (re distribution) of local wealth resulting from the micro regional economy employment benefits around regional airports. This is where the range of small regional airports can make a significant contribution with only modest additional infrastructure requirements.

An approach to regional airports at the aero political level should recognise the tax/ regulatory/ state aid imbalance across countries (particularly UK compared with the rest of Europe) that currently favour the use of the European aircraft fleet outside of the UK boundary. It should resolve without delay  those  disadvantages  and re balance  the  regulatory arrangements .Further it  should recognise the opportunities presented  to  improve local mobility  and reduce surface transport congestion/emissions  issues.

A range of incentives previously described would deliver a very cost effective solution resolving several of the currently debated airport/airspace issues.

September 2014

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