A Frontier Economics report has recently been posted on the Civil Aviation Authority (CAA) website. The report, prepared for Heathrow Airport, analyses the likely impact of constrained runway capacity at Heathrow on fares.
The report adds to the growing research into the economic consequences of constrained runway capacity at airports. As Heathrow has been operating at effectively 100% of capacity for aircraft movements since the mid-2000s it is the airport most prominently impacted by this.
The Frontier report starts from the observation that average fares at Heathrow are significantly higher than at other equivalent hub airports around Europe. We use a comprehensive set of econometric models, to examine whether this differential can reasonably be explained by other factors that may impact on fares, such as: the route mix; proportion of business class seats offered: presence of Low Cost Carriers; and competition from other airports on specific routes. We find that a substantial differential persists even after making reasonable adjustments. There is good reason to consider this differential results from runway congestion and slot allocation rules which limit the possibility of competitive entry at Heathrow. Our econometric findings are supported by analysis of the historic growth in demand for air travel from the London area as well as evidence on the amounts paid by airlines for slots at Heathrow, a behaviour which both strongly suggests the presence of a fair premium. Our results further suggest that some, but not all of this premium consists of higher operating costs imposed on airlines by operating in such a constrained environment.
We estimate that, on average, capacity restrictions may add 25% to long haul fares and 17% to short haul. In practice, this amounts to roughly £200 on average per long haul return fare and £34 per short haul return. The overall annual cost to consumers appears to be in the region of £2bn.
The report feeds into the CAA’s ongoing consultation on the regulatory framework at Heathrow.
Frontier has worked on this issue in the past in the context of expansion at Heathrow airport, and regularly advises parties on the economic issues of runway capacity, slot allocation and airport regulation more widely. For more information please contact [email protected], or call +44 (0)20 7031 7000.
The full report is available here.