Date published: 27th October 2015

Christopher Clarke, the former Chair of the Competition Commission's enquiry which ordered the breakup of the BAA monopoloy, writes about why competition has been good for the airports market and why granting Heathrow a third runway risks curtailing positive future market developments.  

As the Government approaches its decision on whether a new runway should be built at Heathrow or at Gatwick, it is timely to set it in the context of liberalisation and the growth of competition – two of the most significant developments in the airports market in the last five years.

In 2009, I was the Chairman of the Competition Commission inquiry that ordered BAA to sell Gatwick and Stansted, two of its three major London airports, retaining only Heathrow.  We found that the common ownership by BAA of these airports, Heathrow’s position as the only significant UK hub airport, and aspects of the planning system, government policy and airport regulation all had an adverse effect on competition. At that time, Heathrow accounted for 47.8% of passengers in South East England, Gatwick  24.4% and Stansted 16.0%.                                                                                                                                                                                                                             

The Commission believed that increasing competition between these airports under separate ownership would have a positive effect on capacity and route development, service levels, product innovation, and pricing. We expected some of the benefits from competition to manifest themselves immediately but to increase over time.

And so it has proved. Investment levels at Gatwick and other airports have increased markedly, the number of direct international routes from many UK airports – not just Heathrow – has increased, including to Asia, the Middle East and North America, and the passenger experience at UK airports has improved.

Airport charges have generally remained steady; at Gatwick, passenger charges have actually fallen - from £8.84 in 2014 to £8.61 in 2015 - and are among the lowest in Europe. In contrast, the authoritative Leigh Fisher survey of the world’s top 50 airports reported that equivalent charges at Heathrow in 2013 and 2014 were respectively £24.18 and £26.23, the highest of all their airports.

It is clear, therefore, that following the ownership changes required by the Competition Commission, the UK airports market has developed and diversified in ways that were hoped for but that in practice could only be realised by the subsequent investment and other decisions taken by airport owners and managers.

As it reaches a decision on whether to choose Heathrow or Gatwick for the next runway in the South-East, the Government will inevitably balance a range of factors. The Airports Commission has expressed a clear preference for Heathrow but acknowledges that the economic benefits and the extent of connectivity are largely similar to those at Gatwick, whilst the capital costs are significantly higher, the construction timescale longer, and the number of factors that need policy or other intervention much greater.

Against this background, if this was a decision being taken by the Board of a commercial company, it seems unlikely that Heathrow would be chosen, as similar economic returns can be delivered at Gatwick for a lower capital cost, more quickly, and - on a range of parameters – at lower risk.

From the responses to its report there are clearly considerable doubts over some of the Commission’s underlying assumptions, such as the number of passenger currently using Gatwick, and over the risks to delivery of the project from a political perspective, and its susceptibility to legal challenge on a number of fronts such as noise and air quality.

The Government will certainly also take into account wider factors, not least whether expanding Heathrow would undermine much of what has been achieved since 2009 in increasing competition between airports, which has already benefited passengers, freight operators, employees and both the regional and national economy.

Expanding Heathrow risks curtailing positive future market developments just at a time when they might be expected to flourish further and it therefore seems counterintuitive to reinforce the already dominant and high cost position of Heathrow against lower cost and more flexible operators such as Gatwick.

Heathrow is already the most expensive provider of capacity in Europe. A new runway would increase its costs further, scarcely the best platform to compete with Frankfurt, Amsterdam or indeed Dubai. The nation now needs to take account of the nation’s possible future aviation needs: the new capacity we choose needs to be cost effective, resilient, diverse and to provide optionality for differing possible drivers of future growth in the industry.

This is not just a decision affecting London and the South-East: it will influence the ability of all UK airports seeking to compete for new international traffic. Expansion at Heathrow will curtail the growth of direct international connections at all other airports in the UK. Reinforcing the sector’s liberalisation by balancing capacity between an expanded Gatwick and Heathrow will further nurture the benefits already realized from the introduction of competition into the airports market. Building a wider range of capacity, able to meet the needs of different airline models at different price points, is a sensible way to reinforce competition in the sector and to introduce better structural and economic resilience into the system than opting for the world’s highest cost producer, a strategy that has never worked in any industry.