Ring-fencing airport slots for domestic flights is not the way to go
Heathrow Airport Limited (HAL), therefore, has taken its hearts-and-minds campaign to the provinces. It has proposed to establish sites across the UK to act as construction hubs for off-site fabrication. In HALs words, this is to ensure that benefits from the construction phase are spread more widely across the UK (but also to reduce the impact of construction on communities around Heathrow).
Another well-flagged initiative by HAL has been to campaign for greater air connectivity between UK regions and Heathrow after the opening of a Third runway, promoting an image of the regions being more effectively connected with the world through a Heathrow hub. In this context, the airport has joined forces with other lobby groups, seeking political support for ring-fencing a portion of future new runway capacity for use by domestic flights and it has signalled that it will provide a capital fund of £10m for airlines to create new domestic routes when space becomes available. But, for the present, the airport has reduced the domestic per passenger charge to airlines for the use of airport infrastructure. It first did this at the beginning of last year with a further reduction from the 1st January 2018; the discounted charge for point-to-point domestic passengers is now £15 (half the amount charged in 2015).
This is good PR on Heathrow’s part but what effect the charges discount will have for current air passengers is debateable. The cost reduction is unlikely to be passed on to passengers to any significant degree, if at all. In the highly constrained circumstances which prevail at Heathrow, fares on a domestic route are determined by the level of demand (willingness to pay) and the opportunity cost of using a valuable runway slot. BA, for example, has to weigh the direct net revenues it gets from domestic passengers (some connecting to its long-haul network at Heathrow) against the equivalent revenue from using the same bit of runway capacity for flights to and from overseas destinations. There is little incentive to pass-on the charge reduction. The reduction will, however, help to sustain existing domestic routes, now that they are marginally more profitable for BA (and Flybe) to operate.
In the circumstances, the last thing that the regions should vote for is privileged access to Heathrow slots after expansion. Ring-fencing slots for regional services (currently disallowed under EU regulations) would be unnecessary if, after a Third runway was opened, Heathrow was relatively uncongested; if still congested or soon to become so, (as the Department for Transport’s current optimistic forecasts suggest), ring-fencing would lead to privileged domestic services failing to pay the full opportunity cost of those slots. Not only would this quasi-subsidy introduce inefficiencies into the slot allocation system but, by potentially diverting even more traffic to Heathrow, the growth of international services (both short and long-haul) from regional airports would be stymied. And, as a quasi-subsidy, it would raise competition concerns.
As for the £10m that Heathrow proposes to use to encourage new domestic services, it is of course open to Manchester, Glasgow etc to provide similar incentives. But there is a potential issue. Heathrow, unlike the regional airports, is subject to a regulatory price cap. If it was to seek to include the £10m in its regulatory settlement with a view to passing the cost through to its user airlines (something that the regional airports, operating in more competitive markets could not do automatically) this too could raise competition concerns.