Written evidence from Heathrow Airport Limited (ISG 109)

Executive summary

• Heathrow welcomes the Government’s focus on an industrial strategy. Heathrow would like to see an industrial strategy that is genuinely committed to improving productivity, driving growth across the country and encouraging infrastructure development and investment. 
• Heathrow believes that post Brexit it is more important than ever for the UK to attract investment (both foreign and domestic), remove barriers to innovation and ensure all nations and regions are connected with global markets to take advantage of the opportunities available to them when the UK leaves the European Union (EU).
• Heathrow encourages the Government to adhere to free market principles when considering an industrial strategy for the UK, but intervening where appropriate, such as when there is strong evidence of market barriers, failure or clear safety and security needs.
• However, there is a danger that an industrial strategy which intervenes to pick ‘winners’ that are not the market’s choice could be damaging for the UK and lead to a number of unintended consequences. For example, potentially damaging sectors not included or considered and/or it became clear that the level of Government support and public finance required was unsustainable – or wasted. This has happened with airport investment in other countries such as Canada and Spain. In Canada, Aéroports de Montréal’s Dorval Airport (now Trudeau Airport) was operating at capacity, so to cope they built Mirabel in favour of expanding Dorval-Trudeau Airport. However, Mirabel was far from the city centre and not an option supported by the market and so it failed to attract passenger numbers to remain viable and has now shutdown. It is examples like this that demonstrate how the Government can support the market – by ensuring the UK’s industrial strategy and infrastructure projects are supported by the market.
• Importantly, an industrial strategy should recognise and reflect nationally significant industries and those, such as aviation, which are drivers of growth for the UK economy.
• Where possible the Government should also assess how industries might support one another and how large infrastructure projects can be utilised to secure advantages for UK businesses of all sizes and the UK economy. For example, should Heathrow expand, the project will require 370,000 tonnes of high quality steel. Heathrow is committed to procuring British steel for the project – a commitment which would secure 700 jobs in the UK steel industry.
• More broadly, Heathrow strongly believes that expansion is more important than ever and is the only option that can deliver the global connectivity the country needs. Should Heathrow expansion be approved, it will deliver 40 new long-haul routes with up to 180,000 new jobs and £211 billion of economic benefits to be spread fairly across the country. 

About Heathrow

Heathrow Airport Limited owns and runs Heathrow Airport – the UK’s only hub airport. In 2015 approximately 75 million passengers and 1.50 million tonnes of freight passed through the airport – worth £101bn in value, making Heathrow the UK’s biggest port by value.

Heathrow is also one of the UK’s largest transport hubs with the UK’s only dedicated non-stop express airport rail link, free travel zone, the UK’s busiest bus and coach station and the only airport served by London Underground.

Introduction

Heathrow is submitting evidence to the BIS Committee’s Inquiry because we believe there is opportunity for the Government to support the UK economy, via jobs, growth and improve productivity by encouraging investment in infrastructure in its industrial strategy, particularly in the post-Brexit environment the UK is now faced with.

While this call for evidence is not specifically looking at air connectivity or airport capacity, ‘there is strong evidence that good transport links, and especially aviation connectivity, make an important contribution to enhancing productivity, which is an important national challenge’[1] – and one which Heathrow would like to see addressed in the UK’s industrial strategy.

1. What does the Government mean by industrial strategy, and what does the private sector want from one?

Heathrow congratulates the new Prime Minister, Theresa May, on the Government’s recognition that the UK needs an industrial strategy to be a competitive economy, especially in the post-Brexit environment the UK now finds itself in. Heathrow believes the UK needs to show that it is open for business and wants an industrial strategy that improves productivity, supports jobs and growth and encourages infrastructure development and investment (both foreign and domestic). 

Last year, the independent Airports Commission recognised that ‘there is strong evidence that good transport links, and especially aviation connectivity, make an important contribution to enhancing productivity, which is an important national challenge’[2] – and one which Heathrow would like to see addressed in the UK’s industrial strategy.

For Heathrow, an effective industrial strategy supports projects and investment in infrastructure, especially where there is market demand and private investment that deliver benefits for the entire country. According to the independent Airports Commission[3], expanding Heathrow will deliver 40 new long-haul routes, up to 180,000 new jobs and £211 billion of economic benefits to be spread fairly across the country. To demonstrate that Heathrow expansion is the market choice, in addition to being recommended by the independent Airports Commission, Heathrow expansion is also supported by over 370 small and large businesses; business groups such as the Confederation of British Industry (CBI), the Federation of Small Businesses (FSB), the EEF (manufacturer’s organisation), Freight Trade Association (FTA), British International Freight Association (BIFA), nearly 40 Chambers of Commerce from across the country; trade unions including Unite, the GMB, Community and the TUC; cross-party politicians, council leaders; major construction companies including Laing O’Rourke, Mace, Balfour Beatty, Wilson James, Mott MacDonald and Morgan Sindall to name a few; 38 UK airports and airlines such as easyJet who plan to operate from an expanded Heathrow. A large proportion of the local community also backs Heathrow. Conversely, Gatwick has very little market support.

Heathrow expansion also provides other benefits that Gatwick and other London airports are not able to support, such as trade growth, as Heathrow is the UK’s largest port (by value) and handles approximately 25% of UK trade. Additionally, significantly more air freight passes through Heathrow than any other UK airport, while trade growth continues to decline at other London airports such as Gatwick (see Figure 1 below):

Figure 1: CAA Airport Data: Annual Cargo Volumes by Airport (1990 – 2014)

Source: CAA Airport Data[4]

Heathrow believes the Government’s industrial strategy should address and encourage infrastructure investment because the OECD’s last Economic Survey on the UK (2015) highlighted that the UK has spent less on infrastructure than other OECD countries over the past three decades and specifically refers to capacity constraints in the aviation sector[5]. This is particularly pertinent when you consider that ‘no new full-length runway has been laid down in the South East of England since the 1940s’[6]. For the UK to thrive post-Brexit and improve productivity and support economic growth, the UK needs to support and encourage more investment in infrastructure and Heathrow would like to see the UK Government’s industrial strategy recognise the importance of infrastructure and projects, such as Heathrow expansion.

2. How interventionist in the free market should Government be in implementing an industrial strategy, for example in preventing foreign takeovers of UK companies?

Heathrow encourages the Government to adhere to free market principles when considering an industrial strategy for the UK, but intervening where appropriate, such as when there is strong evidence of market barriers, failure or clear safety and security needs.

Heathrow believes that the UK needs foreign investment and the UK Government should not do anything to deter foreign investment, especially as the UK is now faced with uncertainty following the vote to leave the EU – the UK Government should be showing the UK is open for business.

Heathrow supports free market principles and believes in supporting market demand, especially when supporting this demand can be privately funded and delivers benefits for the entire country. For example, according to reports by the independent Airports Commission[7] and Frontier Economics[8], Heathrow expansion will deliver greater connectivity for the UK and cheaper fares for passengers than expansion at Gatwick.

Heathrow has also been operating at capacity for over a decade, while other London airports operate at approximately 60-70% capacity, which further demonstrates that the market’s preferred airport connection is to/from Heathrow – otherwise that capacity would have already been filled, while Heathrow remains full. Other European hub airports such as Paris’ Charles de Gaulle, Amsterdam’s Schiphol and Frankfurt’s Fraport also operate at approximately 60-80% capacity, so it is important that post-Brexit, the UK’s hub airport is able to compete on a level playing field with its European competitors to retain traffic and support growth.

3. What lessons can be learnt from:

• Previous governments' industrial strategies?
• Other countries' attempts to develop industrial strategies?

Heathrow believes there are important lessons to be learned from previous governments’ and other countries’ attempts to develop industrial strategies. Generally speaking, Heathrow believes the Government should let the market decide and not ‘pick winners’, especially if the market’s choice will deliver benefits for the entire country and is privately funded.

For example, in relation to airports/ infrastructure Canada and Spain have previously intervened and built new airports to cope with capacity, but these additional airports were not the market choice and as such, these airports failed to be commercially viable and some have been forced to close. For example, Aéroports de Montréal’s (ADM) Dorval Airport (now Trudeau Airport) was operating at capacity, so to cope they built Mirabel in favour of expanding Dorval-Trudeau Airport. However, Mirabel was far from the city centre and not an option supported by the market and so it failed to attract passenger numbers to remain viable and has now shutdown. Angela Gittins from Airports Council International (ACI) World said to CTV News (2014) that “This area really could not accommodate two major airports.” She added that airlines hold most of the power when it comes to picking their flight destinations, so there was little Mirabel could do to keep the flights coming in, once airlines decided they liked Trudeau Airport better and no matter how modern a facility is, Gittens said a great airfield doesn’t bring in customers – customer demand keeps airports alive.[9]

Another example of interventionist airport development policy is in Spain and the Spanish airports operator, Aena. Aena was previously fully owned by the Spanish Government and throughout this period Aena expanded its network significantly to improve capacity, which included the creation of airports in regions where the business case was not immediately obvious. The result of this policy (according to Aena’s 2014 financial results) shows that 24 out of 48 Aena airports do not generate enough demand to make these airports financially viable[10]. It is examples like these that demonstrate how the Government can support the market – by ensuring the UK’s industrial strategy and infrastructure projects are supported by the market.

However, Heathrow recognises the inherent difficulties with all major infrastructure projects and the need to engage effectively with local communities and appropriately compensate those adversely affected. That is why Heathrow has engaged widely in developing our new plan for expansion, recognising that for it to be successful; business, government and local communities must work together.

4. What tensions exist between the objectives of an industrial strategy and the objectives of other policies, and how should the Government address these tensions?

Heathrow has no particular view, but would like to reiterate that any industrial strategy needs to balance the needs of local, regional and national priorities, provide opportunities and benefits for all regions and nations and create a stable regulatory environment that encourages growth and investment.

5. What are the pros and cons of an industrial strategy adopting a sectoral approach?

• Should the Government proactively seek to ‘pick winners’?
• What criteria should be used to identify which sectors are supported?
• Should the Government prop up traditional industries that it considers to be in the national interest?
• If not a sectoral approach, should the industrial strategy have a broader objective, such as improving productivity?

Heathrow encourages the Government to adhere to free market principles when considering an industrial strategy for the UK, but intervening where appropriate, such as when there is strong evidence of market barriers, failure or clear safety and security needs.

What’s more, the aviation industry is no different to other sectors in looking to the Government to provide a fair and stable regulatory environment that encourages growth and investment from which the country benefits. Heathrow and aviation is a good example. Since 2003, the airport has successfully attracted global investors to fund £11 billion of investment, making Heathrow the largest privately financed airport in the world. As a result, the airport has been transformed into a world-class operation and has won awards for being the Best Airport in Western Europe two years in a row, Terminal 5 as the Best Terminal in the World for five consecutive years and Best Airport Shopping for seven consecutive years.

There is a real danger that an industrial strategy which adopts a sectoral approach and proactively seeks winners would be damaging for sectors not included or supported by the market. Serious questions must also be asked as to how the Government would react to picking the ‘wrong winners’ or if it became clear that the level of Government support and public finance required was unsustainable – or wasted.

Finally, post-Brexit the UK has an opportunity to define a new approach to supporting British industry both here and overseas. However, with the current uncertainty as to what the UK’s relationship with the EU will be following the conclusion of negotiations, all industries will be looking to the Government for guidance and support.

Of course some sectors, such as aviation, are of national importance. For example, Heathrow is a key driver of the UK economy and Britain’s link to the global economy. Heathrow is the UK’s biggest port, handling over a quarter of export goods by value and hundreds of thousands of jobs. Any industrial strategy should reflect the importance of aviation – and other nationally significant industries – as a driver of growth for the UK economy.

As part of any new industrial strategy, the Government should look to encourage or guarantee how both small and large infrastructure projects can support British industry. For example, with Heathrow expansion the airport will require 370,000 tonnes of high quality steel. Heathrow has committed to using British steel. This alone would support up to 700 skilled jobs in a sector, which has faced a number of challenges in recent months.

6. Should the industrial strategy have a geographical emphasis?

• How should an industrial strategy link with devolution initiatives aimed at devolving taxation and decision making away from Westminster?
• What examples are there of interventions from central Government that have successfully supported economic growth away from London and the South East of England?
• How should the industrial strategy work with local authorities and Local Economic Partnerships, reconciling a U.K.-wide strategy and local, regional and devolved nations' priorities?

Heathrow strongly supports an industrial strategy and approach that seeks to ensure the whole of the UK benefits, which is even more important in a post-Brexit Britain. Any industrial strategy must therefore be focused on balancing the benefits of economic growth and finding solutions that work locally, regionally and nationally and be influenced by all interested stakeholders.

Local, regional and devolved priorities are perhaps best managed through a robust and independent process that has the authority to make clear recommendations to Government. It was for these reasons that Heathrow welcomed the establishment of the National Infrastructure Commission and the independent Airports Commission.

It is Heathrow’s view that a successful industrial strategy would need to assess how a region’s connectivity to domestic and international locations and markets can be strengthened. Heathrow, as the UK’s only hub airport and best connected UK airport by road, rail and air, is in a unique position to support that aim. In fact, the Airports Commission acknowledged that access to international connectivity is important in supporting regional economic growth[11].

Heathrow is committed to doing everything possible to support regional connectivity by making routes to domestic airports more attractive to airlines. For example, Heathrow has committed to reducing domestic passenger charges by a third from 1 January 2017. With expansion, Heathrow could do even more and has also proposed a £10 million Route Development Fund to provide start-up support to airlines operating new domestic routes not initially served. Heathrow is also considering what more could be done to protect additional capacity for domestic routes. Our commitments, combined with additional capacity, will support at least 16 domestic routes from an expanded Heathrow – nine more than today.

Heathrow has always been clear that the airport capacity issue is about more than a runway. It is about the future of our country and securing its place at the heart of the global economy by connecting people and businesses to global growth and opportunities. It is essential that an industrial strategy seeks to do the same by supporting regional and devolved efforts in competing for global jobs, trade and investment and grasping new opportunities available post-Brexit.

27 September 2016