Written evidence submitted by International Airlines Group (IAG) (NPS0052)

INTRODUCTION

1. International Airlines Group (IAG) is pleased to submit comments to the Committee’s brief enquiry into the draft Airport National Policy Statement (NPS).  IAG is the parent company of British Airways (BA), the largest airline operating at Heathrow Airport, as well as of Aer Lingus, Iberia and Vueling. In 2016, IAG carried over 100 million passengers in 548 aircraft to 279 destinations across the world.

EXECUTIVE SUMMARY

2. IAG welcomes the NPS and the decision to expand Heathrow Airport.
3. Aviation provides considerable economic and social benefits to the UK and connecting flights at Heathrow, in particular the considerable number provided by BA, deliver an enhanced value by increasing the number of destinations and routes available to UK consumers and visitors to the UK.
4. Given the competitive nature of the aviation market it is vital that new capacity at Heathrow is affordable to airlines and their passengers who will pay for that capacity. IAG welcomes the Government’s statements that charges to airlines must be kept down but the NPS does not take sufficient account of the need for the new capacity to be affordable. Airlines have not been consulted on the scheme proposed by Heathrow Airport Limited (HAL) and proper commercial assessment of the viability of the plans is required. 
5. A development scheme which is unaffordable will have a direct impact on the Government’s aviation policy including the viability of additional domestic services at Heathrow. 
6. Alongside the question of cost, IAG is concerned that the NPS does not recognise the operational flexibility required for flights to connect and deliver the associated benefits. The Government should therefore avoid unreasonable restrictions on night operations that would prevent economically valuable connections.
7. The NPS sets out a wide range of possible measures to support communities affected by noise and emissions. BA has made considerable progress in reducing noise impacts introducing more modern, quieter aircraft and through tactical improvements. IAG and BA will continue to work cooperatively with the Government, HAL, NATS and local communities to reduce environmental impacts but IAG is concerned that the measures set out in the NPS should be part of a balanced approach.

HEATHROW EXPANSION

8. IAG welcomes the decision the Government has finally taken to expand Heathrow and that it has set out its policy approach in the NPS. But, the new runway will be funded by airlines and their customers not by the public purse and, although it is important to have a clear statement of policy intent, the cost of the project will make or break it. We are pleased that the Government has recognised the cost to customers must not increase from today's level if the airport is to have a future. We note that this aspiration is incompatible with the plans so far promoted by HAL.
9. All IAG airlines focus on providing value to our customers, and through its national policy statement the Government must ensure that it is the UK and the travelling public who get the benefits from the runway and not the airport's owners.

CLARITY AND SCOPE OF NPS

10. The scope of the NPS is comprehensive and covers all the necessary areas by which decisions on future development can be made. In general the individual assessment principles are described with adequate depth and clarity. However, there is one notable exception, that of the affordability of the scheme. 
11. This has implications not only for consumers, as it constrains airlines’ ability to keep prices low and to offer more route choices, but also the Government ’s overall transport strategy, in particular its desire to see better connections to the UK regions at Heathrow. 
12. The Committee raises a question as to the effectiveness of the Government's consultation. IAG welcomes the fact that the Government is consulting on the NPS and we are fully committed to consultation with HAL and the CAA but this will only be shown to be effective if the Government listens to the concerns of airlines who are best placed to decide what infrastructure is required for their services and who along with their customers must pay for the project.
13. This submission addresses overall issues of policy raised by the NPS, the affordability and cost of the scheme and environmental and sustainability impacts.

OVERALL TRANSPORT POLICY

14. The NPS reflects elements of overall government policy but because airlines are focused closely on the needs of their customers we are surprised that there are so few mentions of the customer or consumer in this vital document for aviation.  Ministers and officials at the DfT regularly state that the consumer is their policy focus and we hope that greater emphasis would be given to them including, importantly, recognising that consumers also include air travellers and cargo customers.
15. The Government’s policy aims include providing better connectivity for UK regions to London and the choice of Heathrow is partly supported by an expectation that it will do so.  Routes are of course operated by airlines and, through BA, IAG has supported domestic routes reinstating services to Leeds and starting Inverness. All routes are subject to commercial decisions and we believe it unlikely that airlines will be able to operate domestic services on a commercial basis with the current costs put forward for the new runway.
16. We expect the Government to ensure a smooth process for Heathrow’s development including providing certainty through the NPS. We note the NPS can be dropped by subsequent administrations and that without certainty there is a risk to airlines that they will be forced to incur additional planning costs if plans are changed. If this risk cannot be removed then it should be mitigated by ensuring that the airport’s shareholders and not airlines and their customers bear the costs of any future planning work.

AFFORDABILITY

17. When it comes to the conclusions of the NPS, IAG supports the choice of Heathrow but the Government needs to ensure that the scheme provides flexibility in the final design to take into account the needs of airline operators. In particular the choice of a full length 3,500m runway should not be confirmed until commercial assessments can be made based on detailed plans, including a full assessment of the costs and risks associated with bridging the M25 and Colne Valley. This choice of infrastructure has been made without consulting airlines and we would be interested to understand the rationale behind the decision.
18. As indicated above, the cost of the scheme (whether it is affordable) is the key criterion for IAG and for all airlines whose customers will pay for the new runway.  Section 4.36 of the NPS states “The applicant should demonstrate in its application that its scheme is cost-efficient and sustainable, and seeks to minimise costs to airlines, passengers and freight owners over its lifetime”. Although we welcome this statement, along with the Secretary of State’s public statements on the topic this is the only reference to the cost of the project. 
19. We note that the Civil Aviation Authority, in its consultation document on regulating new capacity, goes further and states “it will be important that HAL seeks to meet the aspirations of airlines on affordability (in particular that airport charges do not increase in real terms in both the short and longer-term), while delivering robust and resilient infrastructure that meets the needs of consumers.”[1]
20. The NPS does not make the Government’s approach to determining a reasonable cost for Runway 3 at Heathrow or any future runway capacity clear. IAG would welcome clarity from the Government that it fully appreciates the need to ensure the runway is affordable to airlines and their customers; whether it is delegating entirely decisions on cost to the CAA and if so, how it anticipates monitoring the CAA’s work to ensure that has taken account the needs of consumers and airlines in this most vital part of the analysis.
21. It is important to recognise that the success of the new runway, Heathrow and ultimately the UK’s aviation industry overall are all dependent on the effectiveness of the network connections at the airport (which the NPS recognises), connections provided to a considerable degree by British Airways. Facilitating connections at a hub allows airlines to increase the number of routes on offer as demand for connecting services complement and support demand for direct, point-to-point services, particularly to short-haul European cities. 
22. But the short haul market in Europe is so competitive that the costs of operations at the hub airport are a major factor in the ability to operate them profitably.  The NPS shows that the Government believes that fares will rise if capacity remains constrained and, that if capacity is increased fares will reduce. Unfortunately for this theoretical approach, at the current cost of the scheme proposed by Heathrow Airport Ltd (HAL) it is more likely that ticket prices would be pushed up to pay for the new runway.
23. Given the immense cost of the project we would expect that the Government’s policy through the NPS should allow for a phased approach to development to ensure that airlines are not expected to pay up-front for capacity they cannot use.

AFFORDABILITY AND SURFACE ACCESS

24. The Government expects costs for changes to the road network around Heathrow to be paid for by HAL[2] and IAG is concerned that the current plans to do so require a considerable investment. We understand that HAL have agreed to pay 100% of the costs of the M25 crossing and A4 and A3044 diversions. This creates a considerable risk of cost increases and we are yet to be convinced that the appropriate scheme for roads has been identified. The NPS should avoid committing to specific schemes before details of plans and costs are clear.
25. The NPS should recognise that rail schemes associated with the airport provide wider benefits to the local and national economy and costs should be spread appropriately – it is concerning that they are very uncertain and the cost of rail development schemes is notoriously likely to increase wildly beyond original estimates. Airlines have already committed £70m towards the cost of Crossrail and Heathrow’s regulatory Asset Base already includes £1bn related to rail infrastructure including a provision for Southern and Western rail access to Terminal 5. The NPS should ensure that the basis for prioritising rail projects is clear, for example does the demand justify pursuing access from the West before the South as is the current plan?

CONSUMERS AND AFFECTED COMMUNITIES

26. The NPS sets out a wide range of possible measures to support affected communities and to address environmental considerations. IAG has concerns that these measures are not balanced appropriately and do not take account of the needs of consumers including air travellers and those receiving indirect benefits from current and future air services.
27. British Airways has made significant contributions to reducing the impact of flying on local communities and continues to do so. It has a track record of success in reducing noise impact in strategic and tactical areas not least through the development of Time Based Separation and independent parallel approaches.
28. Major improvements have been made thanks to BA’s introduction of some of the newest and quietest aircraft and the retirement of 21 noisier Boeing 747s and 767s. Further orders of new aircraft from 2018 will again reduce noise at source and BA will also have completed the retrofit of its existing A320 fleet with airflow deflectors to reduce approach noise.
29. Thanks to these kind of measures, between 2006 and the end of 2017, the average noise Quota Count (QC) for the BA long-haul fleet will have dropped by 27% for departures and 30% for arrivals – which means a direct reduction in noise for local residents. For night quota flights the reduction has been even greater with the arrival average QC reduced by 40% between summer 2006 and summer 2016 seasons and by 65% between winter 2006 and winter 2015 seasons, as BA has deployed the A380 and other quieter types.
30. Local communities have therefore benefited over this period from a reduction in noise while no additional night movements have been granted at Heathrow in return.
31. As well as the reduction in noise from more modern aircraft, BA has consistently sought to minimise noise through operational procedures, and to incorporate them into standard operating practices.  BA was a pioneer in Continuous Descent Approach procedures and continues to take action in this area. We constantly evaluate different approaches to assist noise reduction and have taken other actions such as optimising the deployment of landing gear so as to minimise this source of aircraft noise.
32. IAG is greatly concerned by the proposals to restrict night operations unreasonably as are recommended by the NPS. 
33. It proposes a 6.5hr ban on scheduled night flights, somewhere between 23:00 and 07:00. The Airports Commission recommendation was for a ban on scheduled flights between 23:30 and 06:00, whilst Heathrow Airport have proposed a ban on scheduled flights between 23:00 and 05:30.  IAG is concerned that the Government does not fully understand the implications for the timing of the ban in the NPS.
34. Opening the UK’s premier hub airport at 07:00 would directly impact the competitiveness offered to UK consumers and businesses: it would be opening two hours later than Frankfurt (3 hours later taking into account the local time difference). This early morning period is key to the connectivity offered by airlines at Heathrow to provide as many destinations as conveniently as possible to the customer. As we have indicated above, connectivity is vital to the economic success of the airport and to the UK, not least as it competes with other European hubs. The Government should be careful not to throw away the benefits of new quieter aircraft by specifying economically damaging timings for any new night restrictions.
35. In order to make the best use of the new capacity to increase UK connectivity, and to maintain airport resilience, the first arrivals will need to be scheduled to have landed and be on-stand ready to disembark passengers by 05:30, with a high arrival movement capacity in the subsequent 1-2 hours.
36. Analysis by CEPA[3] estimates that the existing night quota period[4] flights contribute £364m GVA to the UK’s economy. UK consumers benefit as these flights support c. 1,800 jobs – excluding cargo impacts – and contribute £69m in tax revenues.  York Aviation[5] have estimated the economic contribution from cargo night quota period flights at Heathrow to be an additional £630m GVA giving a total economic benefit to the UK of almost £1bn per annum.
37. Environmental and affordability issues are related in another respect which is the amount of compensation offered to local people by HAL. While IAG wants to see people properly compensated HAL has gone far beyond the usual amounts offered for public compensation. In doing so, it has no regard for its airline customers who are paying for this as for all elements of the development and has not consulted IAG or others on the topic.
38. We note that the NPS points out that the principal sources of NOx emissions are urban development and road traffic rather than aviation.  Emissions from these sources should be dealt with by wider policy steps, and the NPS should make clear that measures at the airport should address airport specific emissions.
39. We support reasonable measures to reduce traffic and associated emissions around the airport but the Government should consider that any punitive charge for access could threaten the economic benefits that the overall development will provide it if reduces demand. The consequences for where traffic may divert should also be carefully considered.

CONCLUDING REMARKS

40. IAG welcomes the fact that the Government has produced a draft NPS but is very concerned that the current version does not give airlines confidence that it will deliver a scheme for the new capacity that is affordable for airlines and their customers.
41. Heathrow already has the highest airport charges in the world and this scheme will only make them more expensive.
42. There are key policy areas that the NPS covers, such as the choice of a 3,500m runway, that have major impacts on the costs of the scheme and yet about which no airline was consulted.
43. IAG continues to engage with HAL, the CAA and local communities over the prospects for a third runway at Heathrow to ensure it can be delivered to provide the benefits of greater connectivity and more destinations to its customers, that will ultimately benefit the UK as a whole.

March 2017