Surprise! BAA to sell Gatwick; everyone wants to buy it

No sooner do I say that the BAA case will be a hot topic this fall on yesterday’s Things with Wings Radio Show (thanks, Benet!) than BAA beats the Competition Commission to the punch and puts London’s Gatwick Airport up for sale. According to BAA’s chief, quoted in the Financial Times, “We have decided to begin the process of selling Gatwick Airport immediately. . . . Gatwick has long been an important and valuable part of BAA and the decision to sell was not taken lightly. We believe the airport’s customers, staff and business will benefit from the earliest possible resolution of current uncertainty.” This comes after the Competition Commission’s provisional findings indicated that it would order BAA to sell off two London airports and either Edinburgh or Glasgow in early 2009. (See my posts on the provisional findings here and here.)

According to the International Herald Tribune, BAA will continue to contend for keeping Stansted Airport — “At Stansted, we believe that a change of ownership would interfere with the process of securing planning approval for a second runway, which remains a key feature of government air transport policy” — and its three Scotland airports.

The Competition Commission released a statement today indicating that between now and its 2009 final report, it will “take account of any action by BAA in the meantime which may impact the competition problems we have provisionally identified.” Will the Gatwick sale delay the commission’s final recommendations, or will it come quickly enough to send signals about competition in the new London airport market?

And now comes the fun part: airport operators have been circling Gatwick for weeks now, planning their bids for whenever BAA was forced to relinquish the airport. Potential buyers include the Australian infrasturcture giant Macquarie Group, Manchester Airport Group (which owns Manchester Airport in England), Hochtief (which operates and owns shares in several European airports), Singapore’s Changi Airports International, and Fraport (which runs Frankfurt International Airport). The most interesting entry in the mix is Richard Branson, involved through either Virgin Atlantic or the umbrella Virgin Group (news reports are unclear). Virgin has expressed interest in joining a consortium to bid on Gatwick. With this cast involved, the sale of Gatwick may be one of the highest-profile airport deals ever.

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A misleading lede

I was surprised by this lede in a recent Financial Times story: “Most Americans spurned air and road travel over the Labor Day holiday weekend but flocked on to trains as high oil prices and the economic downturn continued to hold sway over US consumers’ spending patterns.”

First, most Americans (like me) did spurn weekend travel. According to the FT story, 51 million people traveled by air, train, or more than fifty miles by car. The story is right that air travel is down and train travel is up, but look at the figures:

• Airline passengers: down 1 million people, or 6.5 percent, to 16 million people.
• Road warriors: down 320,000 people, or 1 percent, to 34.4 million people.
• Amtrakkers: up 10 percent to a total of 322,000.

Does that sound like “flocking” to you? 1,300,000 fewer people traveled on airlines and highways over Labor Day than last year, and the FT would have you believe that 30,000 more travelers on Amtrak constitutes a massive shift in mode preference.

(And why does the FT reporter leave out bus travel? Greyhound serves almost as many passengers per year as Amtrak at 25 million, let alone all the other motorcoach operators. Surely coaches can be much more easily substituted for travel than Amtrak.)

Outside of the dense northeast corridor, Amtrak is simply not a viable substitute for air and car. Its cross-country routes are too long, its schedules too infrequent, its destinations too few, and its delays too common. That’s not to say that some sort of high-speed rail system won’t work here–just that Amtrak ain’t it.

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More on BAA: why it needs to be broken up

I’ve been digesting the UK Competition Commission’s provisional findings on BAA, and I’ll have more to say on the proposed remedies later. Here, in summary form, is what the Commission has found.

BAA was privatized with control of London’s three main airports in 1987 primarily to increase airport efficiency and provide a solid financial base for future expansion. It has not done this. “More than 20 years later, there is inadequate capacity, particularly runway capacity, in the South-East.” Furthermore, BAA’s airports are widely criticized by airlines, travelers, and other stakeholders. The Commission acknowledges that BAA is not entirely to blame — they do not oversee air traffic control, immigration and HM Customs, or airline operations. But BAA is not blameless. They are unresponsive to “the interests of airlines and passengers,” reports the Commission.

Is the lack of competition between BAA’s airports inevitable? Evidence suggests not. The Commission points out strong competition between Belfast’s airports, Birmingham and East Midlands, Cardiff and Bristol, and Liverpool-Manchester-Leeds Bradford. And BAA’s airports are easily substitutable, especially for leisure travelers — there is no natural monopoly in airport services in the Capital or Edinburgh-Glasgow as there is in, say, Aberdeen (where BAA ownership has been OK’d by the Commission).

BAA argues that competition is restricted not by common ownership but by capacity constraints. The Commission agrees, and it also fingers three other culprits in capacity constraints: the planning process, which slows up capacity development; government policy, which shapes future runway investments; and price regulation of airports. But this, the Commission argues, does not absolve BAA: “We acknowledge that to some extent BAA’s actions can be attributed to Government policy and/or the planning system and we have noted the interdependences between them. But in our view, as the owner and operator of the three major airports in the London area, BAA has to be regarded as responsible for their achievements and shortcomings.”

Because of capacity constraints, even if BAA were broken up today, there would be limited competition between airports in the short run. But the Competition found that “under separate ownership . . . we would expect the market structure to be sufficiently competitive so as to incentivize airport operators to overcome the current constraints on expanding capacity and to expand capacity to facilitate competition with one another, increasing competition in the longer term.” In other words, even though external forces impede airport expansion, BAA had little reason to seek out competitive expansion.

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As expected, Competition Commission finds BAA hinders competition at London airports

The Competition Commission has published its provisional findings. Key passage:

Our provisional view therefore is that a number of features each give rise to an AEC:

(a) As regards common ownership:

(i) Common ownership of Edinburgh and Glasgow is a feature which prevents competition between them.

(ii) Common ownership of the three BAA London airports is a feature of the market which prevents competition between them; the effectiveness of competition between them absent common ownership is likely to increase in the longer term, with the increased incentive to invest, although we also see some scope for competition between them in the short-term despite existing capacity constraints.

(iii) However, Heathrow’s position as the only significant hub airport in the South-East and indeed the UK is a feature which restricts competition between airports for some airlines.

(iv) Common ownership of Southampton and both Heathrow and Gatwick is a feature of the market which prevents competition between them, as shown in particular by the lack of responsiveness of BAA to developing Southampton to satisfy the requirements of its airline customers.

(v) Common ownership of the BAA London airports further restricts competition between airports through its effects on capacity constraints; and exacerbates the inadequacies of the regulatory system, reducing the benefit of regulation, distorting competition between airlines.

(b) Aberdeen’s comparatively isolated geographical position and other factors that make it unattractive to serve a catchment of Aberdeen’s size with more than one airport are features preventing competition to Aberdeen.

(c) Aspects of planning restrictions are features which restrict competition by contributing to the current capacity constraints at the BAA London airports.

(d) Aspects of Government policy restrict or distort competition by contributing to the current capacity constraints at the BAA London airports.

(e) The current system of regulation of airports is also a feature which distorts competition between airlines.

Much more commentary on this not unsurprising decision coming soon.

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Wide open skies

Last week, the Financial Times carried an editorial on expanding “open skies” between the U.S. and Europe. After heralding the decline of flag carriers (even more marked with the proposed merger of BA and Iberia), the editors write: “Governments . . . must deal with the remaining obstacles to effective global airline consolidation.”

The US once led the way in deregulating air travel. However, the first European Union-US “open skies” agreement, which came into force in March, showed the Europeans are now keener to open up air traffic. The deal gave US carriers the right to operate flights between EU member states — but the US denied European operators access to its domestic market. After a slow start, Europe can reasonably claim it is now the leading advocate for a freer air-travel industry.

The current open skies negotiations’ top issue is whether the U.S. will allow foreigners to own more than 25 percent of voting stock in U.S. airlines, the quota that nearly scuttled Virgin America. According to the FT,

These absurd anachronisms must be abolished as soon as possible. Removing restrictions on cross-border ownership would pave the way for mergers between US and European carriers. Since the US and the EU dominate the airline industry, it would encourage other countries and regions to abolish their restrictions. Consolidating large airlines adds to their networks and allows significant economies of scale. Confining international operators to operating largely from one continent is ridiculous.

Americans discovered in the 1970s that confining airlines to certain regions or routes was also ridiculous. But what are the obstacles today to opening our airlines to foreign investment and our domestic routes to cabotage (i.e., allowing foreign carriers to operate domestically)? First, U.S. airlines fear competition from rivals that may still enjoy state subsidies or are simply better airlines. There’s no reason to shield them from competition; protectionism is both economically and politically retrograde. Second, small communities fear losing service. What incentive, they say, would Lufthansa have to maintain service to Hibbing, Minn.? Well, Northwest doesn’t have much of an incentive either, apart from a subsidy, so that’s a non-issue. Third, some fear that the U.S. will not be able to exercise sufficient safety oversight over foreign airlines. The solution here is to ensure that the parallel safety institutions in open skies partner countries are equal in quality to the FAA and that all parties are subject to ICAO standards. Furthermore, if we already trust an airline to operate at U.S. airports and over U.S. airspace, there is no reason to block it from a domestic flight. The fourth concern is labor. China is preparing to ramp up its pilot training program to meet domestic needs, but what if a U.S. airline could pump in cheap laborers domiciled in, say, China, who commute to the U.S. to work? At the moment, however, that’s not the situation we’re in. China is instead hiring hundreds of pilots from overseas, as are Middle Eastern, African, and other airlines. The U.S. has become a talent pool for airline pilots. In fact, allowing European cabotage might actually increase the U.S. pilot base, should European airlines wish to take advantage of lower relative labor costs.

Should we expect any tectonic shifts at the open skies negotations?

However, despite acute domestic problems, it is the US government that is standing in the way of a new deal on foreign ownership. Banning foreign takeovers may win populist acclaim, but American consumers should not thank their politicians for shielding their airlines from help from abroad.

Borders in the sky [FT]

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The “green” tax dilemma

News came out today that the U.S. embassy in London has responded harshly to plans by HM Treasury to change the Air Passenger Duty into a per-plane tax at great expense to airlines and, ultimately, travelers. Air Passenger Duty was last raised dramatically in 2006 as an anti-climate change measure. Then-chancellor (and current prime minister) Gordon Brown said that APD was only a temporary solution to restraining aviation’s climate impacts until the sectors scheduled 2010 inclusion in the European emissions trading scheme. Airlines were starkly opposed, claiming that it was merely a revenue grab, and environmental campaigners dismissed its “green” credentials.

The current plan, outlined in a consultation document [PDF] released earlier this year, is to change the per-passenger charge into a per-plane charge based on maximum takeoff weight as a factor of three distance ranges: the European Economic Area, less than 3,000 miles from London (non-EEA), and more than 3,000 miles from London. The argument is that a given plane produces the same emissions whether it is fully loaded with APD-paying travelers or just half-full. The current £40 APD for economy-class long-haul travelers could climb as high as £100, according to the Daily Telegraph — which might severely affect traffic at British airports, especially connecting flights through London’s Heathrow Airport. Indeed, the Treasury acknowledges this in its consultation: “London Heathrow airport has the highest number of international transfer passengers of any airport in the world; transfer traffic there represents 34 per cent of all passenger traffic. Some airlines argue that the knock-on impact of aviation duty would reduce UK transfer traffic by imposing an effective cost on the provision of transfer traffic; and that this would have negative consequences for the UK economy, including through a reduction in the frequency and variety of services that can be offered directly from London.” This exposes one of the major obstacles facing those who would implement regional “green” taxes: competition.

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Power to the people: celebrating the democratization of air travel

The first computerized booking systems dramatically changed air travel, allowing for different passengers to pay different fares and for airlines to maximize the number of passengers and manage the “yield” for each flight. The first airlines to develop reservations systems enjoyed heavy advantages: American developed Sabre, United created Apollo (which eventually became Galileo; both Sabre and Galileo are independent, leading reservations systems today), Eastern formed System One, and TWA had PARS. Small airlines increasingly had little choice but to use these systems, for which they paid handsomely. A good reservations system was a valuable airline asset in the 1980s.

The system owners attempted to use their systems for their own benefit in other ways, too; they charged higher fees to their close competitors than to other airlines, and they listed their own flights first. After all, they argued, they owned the systems, and they were determined to extract the commercial rewards. In the early 1980s, regulators examined the issue, and in 1984, the Civil Aeronautics Board (then only a year from closing down) banned discriminatory practices in listing flights.

Outside of the airline itself, these computerized systems were available only through travel agents. Reading about this recently got me thinking about how much different things are today: the reservations systems still exist, but through the airlines’ web sites and travel sites like Expedia, Orbitz, and Kayak, they are accessible to anyone and everyone. I’ve never used a travel agent, and (with apologies to Cranky) I doubt I ever will, at least for personal travel. Why? I can do it myself!

Technological change in engine technology fueled the first great phase of air travel democratization in the 1960s and ’70s; political and deregulatory change pushed the second phase in the ’80s; and in the ’90s and 2000s, the third phase has been driven in part by access to air travel tools. The aforementioned websites, tools like InsideTrip and Farecast, and helpful travel blogs like those on the right-hand side of this page spread information, promote transparency, and help people make their own travel decisions. That’s something to cheer.

What will be the next phase of air travel democratization? Free flight? Very Light Jets? Air-train partnerships? A viable alternative fuel? Or is there something completely new just beyond the horizon?

Photo credit: Flickr user Kramchang. Used through a Creative Commons license.

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UK Competition Commission leaning toward breaking up BAA; will Heathrow be set free?

The UK Competition Commission (CC) will likely recommend that BAA Ltd., the commercial owner-operator of London’s three primary airports, be forced to sell at least two of them. The CC signals this strong leaning in its “emerging thinking” document published on April 22. The CC is in the middle of an investigation of whether BAA’s ownership of seven UK airports, including the three largest in the London area and the two largest in Scotland, creates adverse effects on competition. It took up the investigation in spring 2007 based on a referral from the Office of Fair Trading.

First, some background: several British airports were once run by the British Airports Authority. In 1986, as part of the Thatcher government’s privatization program, the agency was spun off as BAA plc (today BAA Ltd.) The government held a “golden share” in the firm until 2003, when the European Union ruled against it; in 2006, BAA was bought by Ferrovial Group, a major European airport infrastructure business. BAA both owns and operates seven British airports: Heathrow, Gatwick, and Stansted near London; Southampton; and Edinburgh, Aberdeen, and Glasgow in Scotland. It’s gotten in trouble lately for a failure to keep up with demand at Heathrow, with needed new terminals and runways decades from completion. BAA was further wounded by the Terminal 5 opening debacle at Heathrow, and it has been slowly bleeding customers–airlines and passengers–to much more up-to-date, larger, and expansible airports on the European continent. BAA’s finances are complicated by the fact that its landing fees are capped by regulation, which is why BAA invests so much in retail and other profitable commercial activity, as you’ll see if you ever wander around a BAA terminal.

BAA’s four airports in the southeast of England (especially Heathrow, Gatwick, and Stansted) account for 91 percent of traffic. In its document, the CC considers the extent to which common ownership affects competition, including its affect on responsiveness to customers, infrastructure investment, substitutability of demand, regulation, and capacity constraints and development.

What follows are the highlights from the CC’s 170-page report, with special reference to the London airports:

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Rethinking small community air service

In a post several months ago, I wrote that the rigid Essential Air Service crowds out better, more flexible ways of funding credible and realistic service to small communities, such as the Small Community Air Service Development (SCASD) program. A year ago, the Government Accountability Office reported that although it could not sufficiently evaluate SCASD because it was such a young program, but based on the completed grants they did evaluate, “SCASD grants show promise and warrant further evaluation.” Of twenty-three grants they evaluated, fourteen saw improvements through the end of the grant period and eleven saw these improvements become self-sustaining after the end of the grant period. This suggests that a lot of these grants are unworkable from the start, but almost half saw the intended improvements. (Whether these were self-sustaining in the face of spiking jet fuel prices is questionable, but all other things being equal, SCASD wasn’t a total failure.)

In April 2007, the GAO called on the Department of Transportation’s inspector general to conduct a further assessment of SCASD. It has, and the full report is available here. (Thanks to Benet Wilson, whose blog alerted me to it.) The DOT’s picture is more pessimistic. Surveying the stated goals of forty grants, it found that 12.5 percent are canceled before even getting underway, 50 percent fail, 7.5 percent see partial success, and only 30 percent see full success. But while that makes for a nice headline, there are some interesting dynamics in the numbers.

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Airline regulation revisionists face the wrath of Kahn

Alfred Kahn, the eminent economist and chairman of the Civil Aeronautics Board who oversaw airline deregulation in the 1970s, has published a fascinating new working paper on the AEI Reg-Markets Center site. He addresses the difference between “liberal” and “progressive” views on economic policy and regulation, and he argues that “progressivism” as defined by those who claim its mantle today is not truly progressive — in fact, that it runs against the mainstream liberalism of the mid-twentieth century and its signature economic reforms, such as airline deregulation.

What does Kahn hold up as liberalism? (He is himself a proud liberal, appointed to the CAB by Jimmy Carter and later serving as Carter’s inflation adviser.) “Liberals . . . have historically advocated an open market—private, free enterprise, free trade—economy, with consumers best served by competition among producers and sellers, both internationally and domestically,” he writes. Thus, liberalism in the nineteenth and early twentieth centuries consisted of fighting Republican tariffs, using antitrust laws to break apart monopolies, and supporting free public education and other social services designed to break down heightened income inequality. If this sounds suspiciously like the “progressive” movement of the late nineteenth and early twentieth centuries, you’re not wrong. Kahn argues that liberalism is progressive but that the label “progressive” has been hijacked by radical populists:

As I will argue, partly on the basis of my own experience as a regulator, deregulator, and advisor on inflation to a liberal President, there is nothing either “progressive,” “liberal” or desirable about—successively—populist protectionism, xenophobia, competition-suppressing regulatory cartelization, repression of energy prices, recourse to price controls as a remedy or preventive of inflation or a rush to rein in or hamper the dynamic market processes of technological change—the major areas in which authentic liberals will continue to clash with latter-day “Progressives”.

How does this apply to aviation policy?

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