Effective competition, not political ideology, will ensure Heathrow expansion delivers for passengers

Posted On: 
30th May 2019

When it comes to delivering effective competition that consumers need at an expanded Heathrow - lurching to extreme ideologies misses the point, writes Matthew Oakley. 

Regulated industries are under attack. Spurred by a desire to restore public faith and confidence in markets, hardly a day goes by without policy makers from the Left or Right putting forward proposals for significant reform. Of course, the policy ideas are different. While the Left is threatening to nationalise pretty much everything from the railways and the banks to National Grid and our regional water companies, some on the Right are talking up the need to unleash untrammelled markets while somewhere in the middle, the technocrats are introducing stricter regulation and increased reporting requirements. The problem is that they are all are wrong.

This is not to say that nothing needs to happen. The desire to act is a natural political reaction to the shift in public opinion since the financial crisis of 2008. For example, a 2017 study by the Legatum Institute revealed that the public overwhelmingly believes that senior pay should be capped rather than set at the discretion of management and that government should do more to regulate business. Public attitudes towards profit are also reflective of a view that businesses have been allowed to run unchecked for too long.

It is no surprise that politicians are taking note. However, lurching to extreme ideologies misses the point. We need more competition, better regulation and to achieve that we need effective markets that puts the needs and outcomes of consumers front and centre.

There are no easy answers to ensuring this happens, but most commentators and thoughtful policymakers, including the Chair of the UK’s Competition and Markets Authority, agree that we need a new settlement. In a new paper that WPI Economics has published today we explore how such a settlement could be structured to promote effective competition and boost consumer outcomes in the aviation sector, one of the jewels in Britain’s industrial crown.

The need to do so is clear. At the moment British Airways – currently our only hub carrier - holds more than half of the total take-off and landing slots at Heathrow. The remainder of these slots are split between a large number of airlines, all of which hold very small stakes, leading to fragmented competition where no airline can provide effective competition to the existing hub carrier. These slots are the lifeblood of airlines, enabling them to put on more routes to existing destinations and new routes to other destinations. Given the Government’s primary objective for expanding Heathrow was to bring down fares and increase competition on underserved or unserved routes, it is clear that the existing system is not working. Passengers are missing out on the real choice and lower fares that competition brings.

The allocation of new slots as part of Heathrow expansion will present a once-in-a-generation opportunity to reverse this and put the consumer truly at the heart of aviation policy. But, given the likelihood that the existing allocation system will simply continue the fragmentation of competition, securing these benefits will mean designing a new process specifically to meet the Government’s objectives. Our contention is that this process must be based on securing the right outcome, not political ideology.

Our paper examines three alternatives to the existing slot allocation system and, while they all have their flaws and their merits, each of them would be an improvement on the current system in terms of delivering the government’s objectives of improved consumer outcomes. 

Auctions are, on the face of it, an extremely attractive option for a free market politician. To ensure that the Government’s objectives on competition and passenger choice are delivered, the auction would need to be carefully designed, for example by bundling in such a way as to prioritise domestic connectivity. While this would help the Government meet its objectives, it could also lead to a process that is overly complex and which lacks transparency. 

By adopting an objective-led allocation process, the Government would be able to ensure that allocation was structured to directly deliver more competition on routes and improved domestic connectivity. While in many ways this may seem ideal, it also means that decisions would be made by administrators, potentially leading to additional complexity and uncertainty for airlines. 

The Government could opt for a lottery system but there is a clear risk that this could throw up random results, potentially leading to key objectives not being met. The Government would need to carefully design a lottery system to ensure that effective competition is promoted, for example by awarding more ‘tickets’ to an airline looking to introduce much-needed competition on a particular route.  

Our paper doesn’t present a silver bullet; all three alternatives have their flaws but importantly, each of them would be superior to the current slots allocation system as they would work with the market to deliver the Government’s key objectives. The status quo simply won’t do and while the alternative systems might not necessarily sit naturally with policy makers of the Left or the Right, they have a better chance of delivering the effective competition that consumers need at an expanded Heathrow.

 

Matthew Oakley, Director of WPI Economics and a former senior economist at the Treasury

 

Read the full report here: Ticket to Fly: Using the allocation of new capacity to maximise the benefits of Heathrow expansion