air travel

The Competition Commission has suggested, perhaps commanded (I no longer know what sort of power the CC has given that most competition issues are meant to be dealt with on a Europe-wide basis) that BAA ought to sell some of its airports, and in particular two of the three main London ones. I am uneasy about this for two main reasons...

First off I am deeply suspicious about the timing of the Competition Commission's investigation which seemed to be a (possibly coincidental) reaction to those foreigners (Ferrovial) taking over a British company which had owned those airports for a significant time. If there was a problem with monopoly, surely it should have been taken into account when BAA was first privatised.

And second it is a big step to try and force someone to divest themselves of their own property, especially when it's not as if they are "absentee landlords" but working, and presumably working quite successfully (other than the debt burden) the property.

But there is another problem. The monopoly is not really about the airports themselves - and indeed making them compete directly by being owned by separate owners wanting to maximise their income from each individual airport is likely I would have thought to result in heavier use of all of them, increasing the discomfort for the folk who have to live as neighbours of these smelly, filthy, noisy facilities.

It is exacerbated by the fact that what they really control is access to the airlanes that supply those airports. Airlanes that are, in the economic sense, "land" - part of "unimproved" natural resources with finite space - and in this case also time - (though of course safety technologies can increase the capacity a little) for all the potential users. This is part of the commons, and Ferrovial/BAA and the longer established airlines profit directly from the monopolistic enclosure of those airlanes.

Like the Electromagnetic Spectrum they are part of the "commons" and should be leased at their full economic rent from the state for our collective benefit. They are most commonly called "landing slots" and are worth a huge amount of money - Deloittes reckons that peak day time slots at Heathrow are worth up to £30 million per pair in summer, and there are 9,562 (4,781 pairs - one to land and one to take off on) per week in high season, with an overall limit of 480,000 per year at the moment.

The slot situation is currently, by common consent, pretty chaotic. The government has capped the amount BAA can charge and capped the amount by which it can increase the charge, but 97% of all slots at Heathrow for example are not open to effective competition as they are sold at this capped cost to airlines who have been there the longest, so called "grandfather rights". Heathrow is the only airport in Europe at which there is a significant amount of secondary trading in a "grey" market which is where the £30 million per pair arises. All this profit, the economic rent, goes to the airlines and Deloittes goes on to calculate that BA's slot portfolio may be worth up to £2bn if it were included in its balance sheet as an asset compared with its market capitalisation of around £2.7bn!

The CAA should be auctioning airspace rights to all airports at whatever the market will pay, whilst airports themselves should be responsible for charging the airlines for the use of the "improvements" - the terminal access, ground facilities and so on.

This would force traffic that doesn't actually need to use these massively oversubscribed London airports out to existing regional airports first, often reducing travel times - why travel from Lancaster to London to get a plane if the destination you want is available more cheaply from Manchester - as well as bringing increased economic activity to the areas around those regional airports - airports are a huge draw for international businesses. And unless the overall capacity of slots convenient for travelers' points of origin and destination is actually more than required, would generate a goodly sum for the government in a more market efficient way than say fuel taxes.

I hope we will be having a debate at South Central regional conference on Heathrow's third runway proposals. I believe the rigorous eradicating of this money for nothing monopoly on the part of the airports and airlines through nationwide slot auctions would actually obviate the need for the extra imposition this third runway would cause on teh surrounding areas without affecting overall the competitiveness of Heathrow for flights that really need to use it.

ConservativeHome today covers the latest vapourware announcement in the Tories' slow progress towards finding a policy. This time it's the "Green Tories" (who, you would have thought, might have given up when their tree was repainted - presumably with lead based paint to boot - the other week) and their ideas for Green taxes.

Now of course, many of the tax proposals would have been easy to lift from our Tax Commission work a whole year ago, but I guess what with imitation and flattery and so on we ought to be pleased. But there's a couple of opportunities hinted at in it that I think they, and we, have both missed a trick on...

The list of proposals on air travel issues according to the Evening Standard/Daily Mail includes:

• "A moratorium on all airport expansion, including Heathrow, Gatwick and Stansted;
• The imposition of VAT on fuel for domestic flights;
• A "single flight tax" to shift tax burden from passengers to airlines;
• Domestic flight slots to be handed to long-haul trips instead."

The Mail also suggests that the BAA London airports 'monopoly' will be broken up and 4x4 cars will face higher duties.

It looks like a lot of "tinkering" legislation might be on the way, interfering by government diktat in the market. When actually what's happening is that the market is already skewed and not operating efficiently compared with other forms of transport.

You don't need to put a moratorium on airport expansion, you just need to make sure that all the externalities of airport use are properly compensated for. Airports are vast spaces with huge footfall. Their current land value in enormous. LVT on existing airports and any land converted to airport use would concentrate minds. That would also effectively break the "BAA monopoly"

You don't need to create some confiscatory mechanism to rip domestic slots away from domestic flights and "hand them" to international long haul flights - a form of protectionism of course; air space is ours. Technology can, as it has done over the years, mean that aircraft can use airspace and landing slots more efficiently, but it is essentially finite - as people looking up and the sky over London will realise. LVT can apply to landing slots/airspace use. It would be conducted usually by auctioning slots with the proceeds going to the public purse. It would become less efficient for airlines to pay for slots for domestic flights compared with the overall costs of other forms of domestic transport.

Airports are huge magnets for economic activity. Most of the high-tech industry to the west of London out as far as Oxford is, one way or the other, there because of Heathrow. These businesses do not compete against, say, Devon & Cornwall, but against Silicon Valley or the Rhine Valley areas of Germany so they need good international connections. Auctioning landing slots would encourage airlines to think about where they want to land in the UK and bring into use spare capacity at other, regional airports. This could have a massive potential effect of encouraging those businesses that need international connections to release valuable land in the "Western Arc" around Heathrow and move their economic productivity to, I don't know, near Teeside airport, or Humberside or wherever the landing slot auctions made most feasible for the airlines.

I thought the Tories liked to position themselves as a party of minimal interference. These policies seems to show that protectionism is alive and well and that they do not have a grasp of perfectly natural mechanisms that would encourage the results they want to see without low level market manipulation by governments.