Airports Act 1986 (Amendment) Bill [HL]

Viscount Younger of Leckie Excerpts

Friday 19th June 2015 Lords Chamber

[Viscount Younger of Leckie (Con)]

My Lords, I offer my congratulations to the noble Lord, Lord Empey, on securing a Second Reading for his Airports Act 1986 (Amendment) Bill. The Bill’s aims are admirable. In essence, it proposes powers for the Secretary of State for Transport to direct airport operators, in the interest of national air infrastructure, to ensure adequate services between the UK’s hub airport, Heathrow, and regional airports.

By way of background, it is important to emphasise that the UK has excellent aviation connectivity. The five airports serving London offer at least weekly direct services to over 360 destinations worldwide, more than Paris, Frankfurt or Amsterdam. We have the third largest aviation network in the world after only the USA and China. Although Dubai International Airport has overtaken Heathrow to become the world’s top airport for international travel, it is still behind Heathrow in overall passenger numbers: some 70.5 million passengers travelled through Dubai’s terminal last year, compared with over 73 million at Heathrow. As has been mentioned today, the UK is also well connected by air domestically, with at least 54 weekly air services between UK cities in 2014, and 13 cities with services to a least one London airport. This includes seven cities with services to Heathrow.

The previous Government’s aviation policy framework sets out the importance of aviation to the UK economy and the Government’s proposals on how aviation can deliver for the UK economy while meeting its environmental obligations, both global and local. It stated that airports are in some ways cities in themselves, creating local jobs and fuelling opportunities for economic rebalancing in their wider region or area. New or more frequent international connections attract business activity, boosting the economy of the region and providing new opportunities and better access to new markets for existing businesses.

The aviation policy framework also recognises that airports in Northern Ireland, Scotland, Wales and the English regions make a vital contribution to local economies, and that air connectivity across the UK—and to the UK’s hub airport, Heathrow—is very important. As the noble Lord, Lord Davies, said, this is particularly so for Northern Ireland, given its geographical circumstances, which means that air connectivity for Northern Ireland is an essential means of ensuring its continued links to the remainder of the UK, and is of course crucial for its developing economy. I therefore acknowledge the noble Lord’s concern that the Government have limited powers—for example, in the public service obligation, to which I shall refer later—to intervene to ensure that regional air connectivity is maintained in an air services market that operates almost entirely on commercial lines. As the noble Lord, Lord Berkeley, succinctly put it, they are largely in private hands.

Ultimately this Government believe that air passengers are best served by a commercial airline market that is able to operate in a competitive environment. This allows airlines to determine the routes that they operate, and from which airports, based on their assessment of routes’ viability. In this context, it remains possible that airlines currently operating domestic air services between Heathrow and the UK’s regional airports could in future decide to reduce or withdraw them and use the relevant Heathrow slots for alternative services.

Noble Lords will know that the International Airlines Group, IAG, owner of British Airways, is in negotiations to acquire Irish airline Aer Lingus. Both British Airways and Aer Lingus operate services on the Belfast-London route, and the negotiations have raised some concerns that the merger may see a rationalisation of services. However, under the proposed acquisition deal, IAG has agreed with the Irish Government to include a number of connectivity commitments on services between Irish airports and Heathrow, as well as between Belfast and Heathrow.

The noble Lord, Lord Empey, has suggested that some form of intervention is necessary to protect such services from commercial market pressures that could see them discontinued not just to and from Northern Ireland but from airports in Scotland and the English regions. However, there is healthy demand for services from airports in Northern Ireland, Scotland and the English regions to London. For Northern Ireland, in 2014 there were nearly 1 million passenger journeys between the two Belfast airports and the five main London airports, of which nearly 350,000 were between Belfast and Heathrow. British Airways and Aer Lingus together operated an average of 59 flights per week between Belfast and Heathrow.

Airline competition is also provided by services that operate from Belfast airports to the other London airports; Belfast City Airport has services to Gatwick and London City airports, in addition to Heathrow. Belfast International Airport hosts services to Gatwick, Luton and Stansted airports. We see this demand as continuing, given that Northern Ireland is a competitive destination in its own right. Noble Lords may be surprised to hear that outside London Northern Ireland is the leading UK region for attracting inward investment. This success has been seen across a range of knowledge-intensive sectors. Belfast in particular is the world’s top destination city for financial services technology investments. This continued success has led to over 800 international companies locating in Northern Ireland, employing in excess of 75,000 people. The level of demand that this generates justifies the daily services that both Belfast airports maintain to London and to other European airport hubs and their connecting networks. Belfast International Airport has existing services to Amsterdam Schiphol and Paris Charles de Gaulle, and just last month Belfast City Airport commenced a service to Schiphol.

On the long-haul front, Belfast International Airport has a daily direct flight to Newark, New Jersey, operated by United/Continental airlines. It recently celebrated its 10th year of operation, flying nearly 83,000 passengers. Later this month, Virgin Atlantic will begin operating a seasonal weekly flight to Orlando International Airport. Scotland is also well connected, with 62,000 flights in 2014 between Scottish airports and the five main London airports, carrying nearly 7 million passengers. Of these, around 25,000 flights—that is, 41%—were to and from Heathrow, carrying 3.1 million passengers.

In the broader UK context, the following airports in the English regions currently have air services to Heathrow. For 2014, the last full year of statistics that are available, Manchester had 8,500 flights, Newcastle 4,000, and Leeds-Bradford 1,900. In addition, Newcastle Airport had 500 flights to and from London Stansted and 1,200 to and from Gatwick. Again, the operators of these services have not indicated any intention to withdraw from them.

In the context of these healthy traffic levels on commercially viable and attractive routes, we do not consider that air connectivity between London and these airports is under threat. For the airlines, these domestic air services are important in feeding passengers through to their long-haul services from Heathrow. It is of course open to other airlines to introduce services to compete with incumbent airlines on these routes if they conclude that doing so would provide a commercial return.

[Lord Berkeley]

The Minister has explained that there are lots of services around the country, which is wonderful, but this Bill is actually about slots at hubs, whether at Heathrow or elsewhere. Is there a precedent anywhere else in Europe for slots being reserved in hub airports for regional services? I suspect there is not because there is no shortage of slots in most other airports. Could the Minister address the issue of slots? If it is peculiar to the UK, which I suspect it is, surely the European Commission should look at this with special favour.

[Viscount Younger of Leckie]

I do not have any statistics about slots around the European Union, but the noble Lord will be aware that the allocation of slots at EU airports is governed by the European Union and associated UK slot regulations. It is true that Heathrow has more of an issue because, as various noble Lords mentioned, it is at 99% capacity and other airports around Europe are at not such great capacity. Under the regulations, the process of slot allocation at Heathrow, Gatwick and other slot-co-ordinated airports in the UK is undertaken, as the noble Lord will know, by an slot co-ordinator entirely independent of the Government, the CAA or other interested parties. I will write to the noble Lord with details about other airports around the UK.

As I said, it is open to other airlines to introduce services to compete with incumbent airlines on these routes if they conclude that doing so would provide a commercial return. However, introducing provisions for the Government to direct the UK’s internal aviation market to ensure domestic services to a hub airport could set up distortive effects on airline competition and would be contrary to general EU and wider competition principles. Such intervention therefore carries a high risk of a legal challenge to the UK Government being raised with the European Commission by airport operators and airlines as well by the Commission itself. The consequences of a successful challenge would be substantial fines.

Government intervention to direct particular services from a regional airport to a hub airport would require the ring-fencing of specific take-off and landing slots at the hub. As the noble Lord, Lord Empey, understands, the UK’s major airports, including Heathrow and Gatwick, have constrained capacity, which I have just alluded to. They are therefore subject to EU slot regulations transposed into UK law. These regulations govern the allocation, transfer and exchange of slots at congested airports in the UK. Within these regulations there is some limited scope to allow for the ring-fencing of slots at a congested airport to serve a particular route, provided that this meets the criteria for a public service obligation. However, to do this there would need to be an unused slot at the congested airport. In Heathrow’s case, given that 99% of slots are currently used, as I said, it is unlikely that the regulations would enable slots to be ring-fenced.

Public service obligations are also governed by EU regulation and provide some scope to protect regional air services that may become economically unviable. They can be used to protect air services to airports serving a peripheral or development region or on low traffic routes considered vital for a region’s economic and social development. The aviation policy framework made clear that the Government would be inclined to support applications by devolved and regional bodies to establish PSOs that comply with the specific EU law to protect vital air connections between other UK airports and London and help economic and social development in peripheral regions.

The previous Government announced in the 2013 spending round that £20 million would be made available over two years until 2016 to maintain regional air access to London, where there was the probability that an existing air service would be lost, by establishing a PSO on the route. The 2014 Budget increased and extended this support, which means that government can step in where necessary to maintain existing regional air links to London. As the noble Lord, Lord Empey, has mentioned, the Government have already stepped in to secure the Dundee to London Stansted route—not to Heathrow, as a noble Lord mentioned—and more recently the Newquay-London air route, which the noble Lord, Lord Berkeley, mentioned, after its operator announced last year that it would no longer operate the route, and no other airline came forward to take it on commercially.

Cornwall Council provided evidence that the route met the EU PSO requirements and undertook a tendering process to find an airline to operate the route. Subsequently, in October 2014, the previous Government announced a four-year PSO funding deal for three weekday rotations and two weekend rotations between Newquay Airport and London Gatwick airport, providing certainty for the far south-west region. It is worth giving some background, because the Newquay-Gatwick service carried nearly 44,000 passengers in the first five months of operation, exceeding the projected take-up level by almost 10%. Therefore, it would be open to the devolved Governments in Northern Ireland, Scotland and Wales, and local authorities and other organisations in England, to apply to the Secretary of State for Transport to establish a PSO on a particular air route, should they feel that a business and legal case can be made that satisfies the PSO regulation.

There is no other mechanism for the Government to intervene in the allocation of slots at capacity-constrained UK airports. Noble Lords will therefore appreciate that under European and UK law, the potential for ring-fencing slots at Heathrow to protect regional services could be dealt with only by reference to the PSO rules alone. Again, that was raised by the noble Lord, Lord Berkeley.

One of the principal effects of the Airports Act 1986 (Amendment) Bill is therefore contrary to EU and UK slot regulations, because it would override the strict criteria and process by which European Governments can intervene in route operations. Again, the possibility exists that intervention to ring-fence slots at a hub airport in contravention of an EU obligation could lead to a successful legal challenge.

More generally, I remind noble Lords that a key part of the Government’s approach to aviation is to maintain the UK’s status as a leading global aviation hub as fundamental to our long-term international competitiveness and economic growth. We are also mindful of the need to take full account of the social, environmental and other impacts of any expansions in airport capacity. We therefore look forward to the publication shortly of the final report from the independent Airports Commission. Just to reassure the noble Lord, Lord Davies, it will indeed be published shortly. Once the Airports Commission has published its final report and set out its recommendations, it will be for government to consider the full body of work. We will look carefully at all the evidence and analysis before deciding on an appropriate timetable for a decision on increasing airport capacity.

The noble Lord, Lord Empey, raised the matter of the EU airports package, quoting that it was essential for regional airports to have connectivity to hub airports. The Government are aware of the European Commission’s proposed Better Airports package from 2011 and its slot provisions. Progress stalled in 2012 because of a lack of agreement over other matters. To give the noble Lord some reassurance, should an EU presidency decide to revive the package, the EU would be involved in the negotiations.

In summary, while I understand the noble Lord’s commendable motivations in proposing his Airports Act 1986 (Amendment) Bill, I must conclude, on the basis that its proposals could set up distortive effects on aviation competition and would run counter to EU and UK regulations on allocations of slots at congested airports, that the Government must express their reservations and will not be able to support the Bill into legislation. I know that the noble Lord considers this to be a highly important issue and, as the noble Lord, Lord Davies, said, that he has already undertaken a great deal of hard work at the European level to press for changes that will allow greater member-state intervention in maintaining regional air connectivity. I therefore respect his intentions to pursue the issue further with the European authorities.