A new paper from the free market, neoliberal think tank the Adam Smith Institute explains how we can boost competition in the aviation industry and why Boris and Hunt must commit to competition when expanding Heathrow.

• For the first time, there are multiple applications to build the new terminal at Heathrow Airport.

• Terminal competition — separate construction, ownership, and management for the new terminal at Heathrow — would encourage innovation and lower prices for passengers.

• Boris and Hunt must commit to competition in the £14bn+ expansion project.

• Landing and take-off slot auctions — ending the EU’s administrative allocation system that massively benefits incumbents — could enable 16 million more passengers a year, and raise billions of pounds, the ASI has calculated.

• Auctioning low-altitude airspace corridors for forthcoming forms of transport such as air taxis and autonomous freight drones.

The Adam Smith Institute today calls for a major shake up of competition in the aviation sector, including terminal competition for the first time in the UK, auctions for landing slots to break up cartels and monopolies in the industry and reduce prices for air passengers, and auctioning low-altitude airspace for air taxis and autonomous freight drones to enable the new technology.

The free market think tank explains that competition forces firms to innovate, reduce costs, and be responsive to provide greater consumer benefits. It ensures resources are put to best use. Monopolies lead to stagnation, laziness, overcharging, market manipulation, and higher prices for consumers.

Within aviation, competition has improved from the days of national carrier monopolies, allowing millions of people to fly regularly for their holidays, for work and to see their families. But there is still some way to boost competition and innovation. The free market think tank argues for three recommendations that could radically increase competition, keep the UK at the forefront of the aviation industry, and reduce prices for passengers.

1 - Terminal competition

As the issue of Heathrow Airport expansion makes its way into the Tory leadership debate, the Adam Smith Institute says that separate terminal ownership should be considered. A new terminal at Heathrow could be built and operated by a separate entity, creating competitive pressure to keep expansion and ongoing costs low for passengers. This is the model is used at many leading global airports, including JFK Airport in New York City. There are now two proposals for Heathrow expansion, but no tender-like process to decide which proposal to pursue.

As the sole owner of all the terminals at the congested global hub, Heathrow Airport Limited has substantial market power. HAL’s revenue is capped by the government to a proportion of their total assets. Therefore, the more they spend on expansion and maintenance the more profit they can make. This creates a perverse incentive to overspend and has led to accusations by major airlines of Heathrow ‘gold plating,’ including wanting to charge £74,000 to chop down a tree and £61,000 per car park space at Terminal 2. This results in among the highest costs of any airport in the world for airlines, passed onto consumers in higher ticket prices. Heathrow charges about £20 per departing passenger, and has the second highest operating expenditure per passenger of any major airport in the world. A separate terminal would reduce the ability of Heathrow to excessively charge and overspend.

2 - Slot auctions

The ability for a plane to take-off and land at a particular time — known as a ‘slot’ — is a valuable resource at a congested airport. But EU regulations require these to be given away for free. This system allows the old airlines to hoard slots, preventing new profitable competition in the airline industry. British Airways now has over half the slots at Heathrow Airport. With Heathrow now the government’s preferred expansion plan for a new runway, the of market control by a single airline becomes more stark.

The ASI argues that slot auctions would ensure lead to each slot being used most efficiently and provide opportunities for new and mid-sized carriers to expand; report author Matthew Lesh argues this would help increase market competition, encourage innovation, and avoid arbitrary decision making and political interference.

Slot auctions for Heathrow alone could provide an additional 16 million passengers and giving the country an extra £171.2m of economic benefit every year. This system, endorsed by the Competition and Markets Authority in 2018, would undermine the historic position of larger players and allow new entrants to expand, increasing airline  and increased competition for airlines.

3 - Privatise the air
Air taxis will soon be able to transport passengers from Heathrow Airport to the City of London in 8 minutes and from London to Brighton or Oxford in 23 minutes. Hundreds of hourly take-offs and landings could congest the skies, requiring allocation of scarce air corridors.

Bureaucratic allocation of access to congested airspace would be unresponsive to changing technology, entrench early movers, and lead to inefficient allocation.

The auctioning of rights to operate an aerial travel corridor, at a specific altitude over for a period of time, would deliver efficient use of the space, and raise substantial revenue.

Flying between 200ft to 5,000ft above ground, air taxis and freight could transform the economy in the UK and other developed countries; the global air taxi market has been estimated to become worth between $615 billion and $3 trillion by 2040.

Matthew Lesh, report author the ASI’s Head of Research said:

”From flying taxis to faster and further flights, the future of transport is going to be awesome. But we have to get the policy right to foster competition and innovation. We must not make the same mistakes as the past. The Department for Transport should carefully consider the potential for terminal competition at Heathrow Airport, particularly in the context of competing Development Consent Order applications. The Government should pursue slot auctions to ensure new capacity is used efficiency, delivering more passengers and a big boost to the economy. To prevent the mistakes of the past, the government should also auction airspace for air taxis and autonomous freight drones. This would ensure the increasingly congested space is put to its best use.”

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07904 099599.