Welcome to this morning’s evidence session of the Transport Committee. This is a one-off session in the light of the Chancellor’s recent announcement on Heathrow expansion in the context of economic growth. We may come back to look at aviation in due course with a full inquiry. Today, we are examining how clear the links are between airport expansion and economic growth across the whole country. Could I ask each of the witnesses on our first panel to introduce themselves?

Hello. I am Dr Alex Chapman from the New Economics Foundation, senior economist.

I am Chris Cuttle, an associate director at Frontier Economics.

I am Professor Brian Pearce from the Air Transport Systems Laboratory at University College London.

Hello. I am Marc Postle. I am here as an independent economics consultant with previous airport expansion analysis experience.

Welcome. As we will be trying to cover a lot of ground today, could you make your responses brief and refer to publicly published material as a way to save time, if that is possible? I know each of you has published a fair bit of information over the years. Thank you. Could I start by asking Professor Brian Pearce whether the global aviation picture is the same now as it was when the Airports Commission, which you were involved with, conducted its analysis of the different options for airport expansion in 2015? If it is not the same, why not?

No, it is not. When the Airports Commission were looking at the third runway recommendation a decade ago the world was a much more tranquil place. What came to be their central scenario was, essentially, an extrapolation of those benign trends. Since then, we have had some major changes in the world. It has become much more fragmented geopolitically and in trade, with a lot more protectionism. We have had some major shocks, of course—the two most notable being the covid-19 pandemic and the war in Ukraine. We have just about seen the global aviation industry recovering back to pre-covid-19 levels on many metrics. Now, the numbers of flights, connections and passengers are back to those levels. We have lost about four or five years’ growth. Overall, all those impacts—the war in Ukraine—have led to higher inflation, higher costs. We have seen a downward revision in long-term growth projections. Basically, we are now looking at air transport growth on a slower trajectory than the one that we saw a decade ago.

Has the UK’s position in global aviation changed?

I don’t think so, no. Actually, the UK has always been a leader in many respects in the development of transport regulation, in aerospace with Rolls-Royce and with leading airports and airlines. The London air travel market is the largest in the world, ahead of New York and Tokyo, particularly so for passengers paying premium fares, where the majority are likely to be business passengers. London has twice as many premium fare-paying passengers as New York or Tokyo. It is a very important part of the market and an important part of the growth element. Heathrow has been losing ground over the years, particularly to the Gulf airlines and Dubai, but it is still the second busiest international airport. On many metrics, it is still the top airport for international connections, which again are an important part of the growth story for both business travel and trade. Those have not changed. Obviously, Heathrow has been full for two decades.

Thank you.

Good morning. The next few questions are on how aviation contributes to the UK economy. Very simply, how do airports generate economic growth? Could each of you cover directly and indirectly which sectors are impacted?

I will start with the non-controversial stuff. It is important to recognise that airports have a vital role in modern transportation. Through that, in terms of the economy, they provide linkage for travel, business meetings and freight and access to holiday destinations, making places a nice place to live. That is recognisable. They are large businesses, in and of themselves, and locations for other businesses, such as retail and hospitality; you can look at employment and say, “Oh look, there’s an airport; there are jobs.” We all recognise that is the case. There are benefits but also costs. It is worth pointing out, before going into sectors and such, that within the UK we are not really discussing whether or not we are bringing connectivity for the first time. We are talking about already connected places. The question is not whether airports are sources of growth. The question is whether the additional flights are worth the additional costs.

If we are thinking about how air transport and airports in particular help economic growth, we need to distinguish between bringing spending to the economy, which tourism might do—that is not where I would place the emphasis—and building assets and capabilities to enable non-inflationary growth. What we are talking about with an expansion of capacity in London is enabling high-tech businesses, essentially, to trade, and enabling business travellers to gain business and to get ideas and technology transfer that improves the productivity of businesses using the airport. I don’t think it is anything to do with the tourism spend or the employment at the airport. It is the asset that we are creating there to help British business.

I agree with a lot of that. Aviation generates value in lots of different ways. It is because there are lots of different passengers flying around. We have business, leisure and visiting friends and relatives. We have UK-based passengers flying abroad and foreign passengers coming to the UK. We have cargo as well. There are lots of different types of activity happening. The science on how we value that activity has definitely been evolving over time. As Brian mentioned, old airport economic impact studies often tend just to focus on how many workers are employed at the airport: “There are 50,000 workers at our airport and that is our contribution to the economy.” To be honest, I never particularly liked many of those studies because they ignore why people are actually travelling in the first place and what is the activity that is being enabled. Lots of the science now focuses much more on productivity and wellbeing. On the business travel side, we know that air travel is an essential input for many businesses. Face-to-face meetings continue to be important. I understand this meeting was meant to be face to face rather than virtual, so there is probably a nugget in there somewhere. Even with covid, there were still nearly 13 million business passengers at UK airports last year, with UK businesses collectively spending tens of billions of pounds on business travel. They must be doing that for a reason. Ultimately, they believe it is because business travel and face-to-face contact help to boost trade and investment. There is lots of literature now that talks about trade openness and productivity. It basically says that countries that trade more, whether it is imports or exports, are ultimately more productive. There is lots of literature that talks about that point. On the leisure point and thinking about wellbeing, I feel that leisure and visiting friends and relatives is sometimes slightly trivialised as people just going on holiday, spending money abroad and, “How can spending money abroad be a good thing for the UK economy? Perhaps we should just lock everyone in the UK.” There are really important wellbeing, mental health and life satisfaction benefits as well. How many times have we heard people say, “I desperately need a holiday,” and they come back refreshed, recharged and productivity boosted? It might sound a little bit woolly, but there is a productivity angle as well. Those points are very hard to quantify.

What I am hearing, I generally support, which is the principle that airports are transportation infrastructure, and obviously all jobs are important and jobs in and around the airport are vital, but fundamentally you do not build a motorway to create jobs in motorway service stations. It is about where you move people around in the economy and why you move them around. You can split the market into leisure and business, and we have heard a lot about business. Of course, there is a fundamental problem. In the last 20 years, there has been around 25% real-terms GDP growth and there has not been a single additional business passenger leaving through our air network in that period. There has been no growth in that market since 2006. Obviously, there has been recovery. I am not saying that there has not been a year when the numbers have gone up. There was a crash after the financial crisis, there was then some recovery, then there was another crash through the pandemic, and now we will probably get some recovery. The latest numbers I have seen suggest that, as of 2024, business passengers will probably still be down about 20% on their pre-covid level, suggesting that what we have seen is a structural shift in the passenger base. With 20 years without growth, what can we say about the next 20 years? We need to be very cautious about what we assume about how much demand there is. One way of measuring how the economy has been developing is to look at how many business flights there have been for every £1 million of GDP in the economy. In 1990, we had six flights or so per £1 million. By 2000, that had risen to around eight flights per £1 million. The aviation intensity of the economy was rising. By 2019, that had fallen back down to only six flights per £1 million. By 2023, it was down to four. Obviously, that last data point is probably affected by the legacy of the pandemic but there is a clear trajectory: the upward curve has now peaked and is on its way down again. The reason we have to be careful about that is that if we calibrate our models on the upward phase, which is 1990 through to probably about 2010, although there were various disruptions to aviation through that period, you assume that that past period is a good forecast of the future, when I would say it is not. We also talked a bit about leisure passengers. Yes, clearly there is a value to those passengers—those individuals—in general, but it is important to think about what we are doing to the economy when we encourage this huge outflow of cash. In 2023, about £40 billion net flowed out of the economy. Over the years, economists have debated whether that form of spending is a problem; there are different schools of thought. It is fair to say that the original position used to be, “It doesn’t matter. That money goes out of the economy from these leisure passengers; it comes back in some form, typically by foreign investment.” That may be so, but there are two key factors that the last 10 years of economics require us to look at more carefully. The first is the equity of where it flows out from and where it comes back. If it flows out from the wider regions and comes back into London and the south-east, that is not helpful to our strategic aims for the economy, as I understand the way the Government want to see its growth developing. The second issue is what form that money takes when it comes back in. Is it useful investment in the UK economy? Is the money that we spend overseas in Spain then being invested by Toyota coming and building a new factory in the UK, or is it being used—this is what we have seen far more in recent years—to purchase British assets? Is it being used to buy up property on the high street, particularly in London and elsewhere, or just to buy up companies that deliver our public services in a form that allows rent extraction by foreign residents? That lens through which we see the way that aviation interacts with the economy is deeply under-discussed. There are plenty of academic papers that highlight that fact and we should probably be talking more about how it works.

Moving on to the geographic impact of growth, Scott.

Thank you. This is really interesting. I am an MP for Edinburgh. Some people in Edinburgh would say, “This is just yet more investment in the south-east of England”—a long-term problem the UK has had. How will people in Edinburgh and elsewhere outside the south-east of England benefit from investment in airports?

The main argument would be that if you are looking to fly to distant cities for trade, the important thing for growth would be to create business opportunities or technology transfer to boost the productivity we have been talking about, but on many routes from the UK there are not enough passengers to make it viable. You need to consolidate those passengers in a hub; that is in London. The benefit might be that businesses, in particular in Edinburgh, would be able to use those flights to generate business and trade.

How does that differ from changing my flight at Amsterdam? How does it benefit Edinburgh more?

It doesn’t.

Exactly.

Lots of people in the north of England, of course, transfer via Amsterdam or Dubai. Yes, that benefit to Edinburgh can be served by hubs elsewhere. The majority of those benefits will come in the region of London, particularly with some of the high-tech clusters in the region around London, rather than in Edinburgh.

Does anyone else want to say anything on that?

It is worth talking about the benefits for somewhere like Edinburgh. In the past there have been discussions on how you boost domestic connectivity. The fact is, as shown in the modelling for the Airports Commission previously and for the national policy statement, that domestic flights within the UK from Heathrow, from those major airports as they grow, are going to be priced out. The only way to maintain that connectivity will be through public subsidy or through Government action to enforce domestic routes. That is worth bearing in mind.

Capacity constraints at Heathrow come at a cost to the UK in general. When there are capacity constraints at our only hub airport and the main gateway for long-haul markets, that will come at a cost. At Heathrow, we have seen passenger volumes increase in recent years, but that is airlines trying to squeeze out the most they can get. The number of flights is capped; Heathrow has been operating at full capacity for around 20 years. Airlines can deploy larger aircraft, and they have bigger load factors. They can switch out some short-haul connections for larger capacity, long-haul connections, which dampens some of the domestic connectivity that we are talking about. Ultimately, the UK ends up less well connected. There will be lower frequency on the existing routes that we have and there will be fewer connections added, because they are squeezed out for the high-demand routes. We also know that when demand exceeds supply, ticket prices rise. We call that the congestion premium, seen in loads of markets; whether that is London house prices or tickets for Oasis and Taylor Swift, prices rise. That means that passengers who fly end up paying more to do so. Then there is a whole load of passengers who cannot fly, so that activity is being squeezed out. All of the business passengers, even the leisure, the visiting friends and relatives that would have happened—all of that activity does not happen. As I mentioned before, the productivity and the wellbeing effects ripple throughout the economy; they are not just located in the south-east. If a Japanese manufacturing firm was thinking about investing in a new factory in the north-east of England—

Edinburgh.

Sorry, yes. Air connectivity will play an important role in their decision there as well. The DFT forecasts that by 2050, with capacity constraints, there might be as many as 100 million passengers per annum who would have flown if we had the capacity but who will not fly if we do not have the capacity. That is a lot of people. I am sure there will be lots of different anecdotes about business travel and leisure. It will impact the entire country.

The fundamental challenge, again, is considering strategically what we are facilitating. Despite the stated capacity constraints at Heathrow, the business passenger share at Heathrow has been in decline. There is something not quite right about the logic of that because all the models suggest that, when business passengers are there, they are willing to pay quite a significant amount more to travel than a leisure passenger is. If there is capacity already in the system, which there is aplenty—there are 300 million passenger movements in and out of the UK every year, and we are widely regarded as one of the best-connected economies in the world—and if the connectivity is there and there is business demand, that business demand should be fulfilled within the current system. It will displace the low-value leisure flights, whether that be at a regional airport or through Heathrow. That is borne out by the DFT’s modelling. That is not what is happening. If anything, it is moving in the opposite direction. If we look at the latest data, from 2024, what we see getting added to the network are more leisure destinations, more resort destinations; 680,000 more passengers are now going to Antalya and 220,000 to Dalaman in Turkey, and there is massive growth in Greece and in the Canary Islands. Those destinations are not business destinations. There are massive increases in spending in those places, of course, which is another question as to whether it is good for regional economies, and for national economies like Scotland, to encourage our residents to spend more money on dental work in Turkey, to use a silly analogy, and other places. That is not helping the UK economy. That is the reality of it. If you scrutinise the destinations I have just described that are seeing so much growth, you see that they are getting longer-haul. We used to just go to southern Spain. Now we are going further for resort destinations, such as the Canaries—four or five-hour flights. The question is, therefore, if we expand Heathrow and enable further long-haul destinations, which is principally what Heathrow does, are we just encouraging those people to go to Bangkok, making it cheaper to go even further? Yes, there is probably a welfare benefit to the individuals involved—I won’t deny that is the case—but, strategically, it is a huge cost to the climate and to wider society. Is that really worth it, especially when we then consider that those leisure passengers are often frequent flyers taking advantage of this? It is only viable to go to Turkey to get your teeth done because the flights are so cheap. You can get off-peak flights for 30 quid. How is it beneficial for our UK regions to encourage that type of spending? That is the question we need to ask. If there is untapped business demand and there are businesspeople in Edinburgh needing connectivity, why is it not being fulfilled within the massive connectivity and the network we already have? Are there policy interventions Government could pursue to chase that green growth, which would fulfil the business need but without increasing the overall passenger load and damaging the climate in the process?

That is interesting, but I have to change topics very slightly. We have touched on this a little bit. Reading the notes we have been provided for today, one thing that cuts through is that it seems to be quite difficult to measure the economic impact of the aviation sector and even more difficult to predict 60 years into the future, as we are talking about here. Why is it so difficult? How much uncertainty is there around those future predictions, 60 years into the future?

In terms of the impact on the UK economy.

Yes, sorry. Thank you.

Frankly, it is quite hard to measure some of the difficult-to-estimate impacts, such as on productivity and wellbeing. The Green Book and WebTAG provide guidance on how to carry out cost-benefit analysis, but it is exactly that: it is guidance—high-level guidance. It does not provide a detailed step-by-step guide for how to carry out cost-benefit analysis for every conceivable type of investment. There are lots of nuances in the expansion of Heathrow. There are international cross-border impacts. There are all the productivity and wellbeing impacts as well. The Green Book says that you should be trying to measure productivity benefits where possible, but it notes that they are very hard. Similarly on the wellbeing side, you should try to include them where possible, but it is very, very hard. The science is evolving in that space. In terms of different studies producing different results, if you look at the analysis carried out by the Airports Commission, which carried out lots of different types of analysis, not just one, and you look at the results from the DFT last time round, in 2017-18, and some of our recent results as well, they all point to very strong, net positive cases. The science will change. Some of the inputs will change as well. For instance, Heathrow’s passenger forecast and its plan on the ground may subtly change. Earlier this week, they said they were looking maybe to accelerate some of the expansion. That will obviously have a different impact around cost and benefits. With these things, it is a moving target as regards the plan on the ground. It is very hard to estimate some of the impacts.

When you look 60 years into the future, how much uncertainty is associated with some of the numbers that you have bandied around?

There will be lots of uncertainty, which is why it is important to carry out lots of different types of analysis. The Airports Commission produced thousands of pages of analysis, carrying out different approaches, lots of qualitative arguments as well, talking about the importance of hub capacity and so on. Yes, frankly, there is uncertainty, because these things are hard to estimate. We see so many people flying. It is a great thing to be able to get your teeth done quite cheaply abroad in Turkey. Maybe people quite like that. With so many businesses flying each year, the benefits must be there.

I am sure this Government have a commitment to ensure everybody gets access to an NHS dentist. Do you want to come in on that, Marc?

I can talk a bit more about why economists disagree generally with those kinds of reports, but on the topic of forecasts and scenarios, one thing that is very interesting and is perhaps worth taking into consideration is the DFT updated appraisal of the Airports Commission work. As was said, they did a bunch of different scenarios. One of those scenarios was around high carbon costs: what if we are in a world where carbon costs are much higher than what was assumed in 2017? We are in that world. The DFT guidance now is high carbon costs as a central case, so there is now a higher, higher cost. If you look at that scenario, none of the things considered at that time is net positive according to the DFT’s assessment.

Uncertainty.

Yes.

You need to take forecasts, particularly 60 years out, with a great big pinch of salt because we just do not know. No one knows.

It is also important to note that, given, as we have said, the centrality of business passengers to all of these big numbers, when you put out big productivity benefits, it is always the business passengers who are driving them. The Airports Commission work, it looks very likely, is fundamentally wrong in the forecasts they put out in 2014-15. They anticipated quite significant growth in the business passenger market by 2030. We are not at 2030 yet, so there is still the possibility of a huge turnaround, but as opposed to growth, we are looking at the moment at being below the level of their baseline, 2011. That means all of the figures that contributed to the models they put out have been proven to be wrong. Many people had deep concerns about the veracity of those models, which we will hopefully come to at some point, but none the less, those models were based on forecasts that have been proven to be wrong. That comes, typically, from over-optimism—a bias towards an optimistic view of the future, rather than a realistic one, which we now need to have.

I can have a go at that one. At Heathrow, we estimated the congestion premium that I described before. That says that when supply is fixed and demand rises, prices must rise to price that demand out of the market. We have estimated that impact on a number of different occasions, using different approaches. We estimate that ticket prices at Heathrow are around 20% to 25% higher than they otherwise would be, without those capacity constraints. Across all passengers, that equates to about £3 billion per annum. The CAA and the DFT also recognise this impact. The DFT calls it scarcity rents. The CAA also describes it. Thinking about how much demand would be higher, and about some price elasticity of demand, it possibly suggests in the order of about an extra 20 million passengers at Heathrow per annum, as a rough estimate.

Yes, but the capacity constraints are at Heathrow. If there are no constraints at other airports, demand is not being priced out.

So the capacity constraints determine the higher ticket prices, and not the higher landing charges, and presumably, in the long term, recouping the cost of the additional infrastructure.

Yes, that is correct. You will find that if you put flights on the market, prices rise if there is lots of demand for them. That is the dynamic there.

I agree with what was said. I also suggest that if you are thinking about whether or not there is underlying demand for more capacity, particularly at Heathrow, you should look at the market for slots, because those are incredibly valuable. Airlines are willing to pay tens of millions of pounds for a slot pair. Presumably, they do that because they can see there is demand from high-value passengers, which, I think, will be more business passengers than people wanting to fly to Spain.

I have a slightly different philosophical view of the way this question should be addressed. A householder in the UK has, say, £1,000 in the bank, and is presented with a range of different things they could spend that money on that give them different levels of value in return. A position being promoted heavily by the industry is that it is an inevitability that those households want to go overseas. That is what they demand and the demand is there. In reality that is not how it works. A householder is making a decision between one good and another, and obviously a lot is to do with the price. We have been through a period in the last 20 to 30 years when the pricing structures around aviation have massively incentivised households to spend their money there. There is no VAT and no fuel duty, and more or less unfettered expansion of airports. Obviously, there have been lots of different cases, but, broadly speaking, previous Governments have had very positive, airport-friendly policies that have allowed the industry to continue non-payment of the fair costs of the environmental damage it does. It does not pay its cost; that is a fairly well-known fact. By cutting artificially the price of air travel against other competitor products, such as the UK’s domestic tourism industry, which has not benefited from the same treatment over the years, you are pushing households to make that choice. It is not an inevitability. When you ask households, “Why did you fly abroad this year?”, they say it is because it is cheaper. Would they have gone domestically? Yes, they would, but they are making that trade-off because they are incentivised to do so. What is the correct counterfactual? I would say the correct counterfactual is one where aviation pays its way. Once the ticket price is fair, how much demand is there for that product?

I suspect demand would be considerably lower if aviation was paying its full carbon costs of the flights. Interestingly, on that point there have been a lot of assumptions, particularly in the Airports Commission work, that aviation will at some point eventually pay its costs, but right now that policy does not exist, particularly on flights to non‑EU destinations. There is no carbon taxation and no trading system; there are no schemes in place to tax those flights fairly. There is high demand, but it is in a way an artificial creation of the way Government have set the incentives in the system.

I certainly agree that travellers and shippers should pay the full cost of their activity, and that is not happening at the moment. Where I disagree a little is that, if they did, I don’t think it would stop the growth of air travel. We have seen a big fall in the cost of air travel primarily because very efficient aircraft engines from Rolls-Royce and others have lowered the cost of air transport.

On the growth in demand specifically at Heathrow, where I think currently around 80% of travellers are leisure or friends and family and around 20% are business, Heathrow has confirmed today that it wants to go for a third runway and is looking to increase passenger capacity in the existing configuration of runways and terminals, but within the cap for that bit. Who are the travellers projected to fill that increased capacity at the expanded terminals and the third runway? Are they business or leisure? Are they interlining between the UK and international, or are they international to international? What do we know about the projections of who those passengers are? Are they of UK origin flying out and back, or are they overseas flying in and out again?

It is probably all of the above. I spoke earlier about how capacity constraints lead to worse connectivity, lower frequency on existing routes, fewer connections in total and higher prices on routes. What we would see is that airlines would add new flights on existing routes. The fact that there were more seats on those routes means that prices would fall, so that reduction in price would stimulate new demand. It is difficult to say exactly who will be on those flights, but the evidence in terms of price elasticity of demand suggests that, when prices fall, demand will increase. There will also be brand-new connections, tapping into new markets and stimulating new demand that can get to the places with a direct connection.

Even though the number of destinations from Heathrow has fallen consistently over recent decades.

I see that as a bad thing—

That is the market—a lot of routes are no longer provided.

Exactly. I think that comes down to the airline saying, “We have maybe six flights a day to this domestic connection with, say, 120 passengers on the flight. Could we get rid of that flight and add a larger aircraft to New York, for instance, because we think we’ll get more passengers?” If the capacity constraints were eased, we would probably see an increase in the domestic connections that are then squeezed out, and brand-new domestic connections would be added for the first time. It is a combination of new connections, both domestic and abroad, and greater frequency on existing routes, and that will lead to lower prices and drive demand.

One way of looking at it is what has happened in the last 10 to 15 years. Passenger numbers in the London airport system have grown by several million and over that period there has not been a single additional business passenger. Across the UK, the proportion of people who do not fly every year has remained roughly stable, at around 50%, meaning that about two thirds of your new capacity is taken up by people who already fly flying even more frequently, and about a quarter of your new capacity is incoming passengers from foreign nations, indicating that around 75% of the newly-added passengers are UK residents flying out, not foreign residents coming in.

Business travel is really important in terms of how an airport can stimulate economic growth, but the other important role is air cargo and trade. Heathrow is the UK’s largest port. An enormous amount of trade goes through it.

By value?

By value, and that is the important thing. Airlines carry goods of high value and low weight. They support the high-tech industries, the car industry and pharmaceuticals. I think that is where a considerable amount of the growth impact of expanding airport capacity could come from.

Correct me if I am wrong, but there hasn’t been any growth in air freight by weight of any notable level in the last two decades. Is that right?

Because things are getting lighter.

Microchips.

It indicates that maybe new capacity is not needed. Broadly speaking, if there is huge freight demand, why are we adding thousands of flights to Greece and the Canary Islands? We don’t send any freight to those destinations.

It could be both—passengers and freight.

The key point is that the business passengers tend to line up better with the freight destinations, but the leisure destinations less so. If there was more freight and business demand, it would be pushing out the really low-value leisure flights; it would be dominating, but it isn’t. It should be willing to pay more than the market.

Heathrow is constrained. You cannot add more flights at Heathrow unless you take away another flight. If we are talking about connecting the UK to emerging markets, because of the hub-and-spoke model Heathrow is the main gateway for long-haul connectivity, so the new long-haul connections will be added at Heathrow, but there are constraints. I fully expect that if there was expansion at Heathrow there would be many more long-haul connections and there would be freight on those flights as well.

But how will domestic connectivity be able to compete in that context, given the high price of slots and landing charges?

What do you mean by “compete”?

Scott was rightly concerned about how expansion at Heathrow would benefit Scotland, for instance, but you are saying that much of the additional demand would be filled by long-haul flights, not domestic connectivity.

There will definitely be more domestic connections added. We have seen a reduction in the number of flights on domestic routes over time. That is the dynamic I raised earlier; airlines think, “Let’s get rid of one of these flights per day and add it on another route.” With the capacity there, there would be an unwinding of that approach and we would see more flights on domestic routes and more routes would be added as well. In terms of trucking freight to Heathrow, the regions would also benefit from those long-haul connections.

Is the fall in domestic connectivity or passenger numbers driven not so much by airports switching to overseas routes but by the decline in business travel within the UK? I live in Edinburgh. Pre-covid, lots of people would go to London or Edinburgh for a two-hour meeting and then nip back again. I use the train every week. It is now dominated by leisure travellers. I do not travel first class, but even in first class I can see that it is leisure travel rather than business. Is that not what is driving the change in the domestic market rather than airports switching to overseas routes?

It is probably a combination of different factors. It is undeniable that during the pandemic many businesses took to Zoom and Teams and found that for certain types of meetings it was not bad. You can imagine a scenario where you have, say, four intra-company meetings a year and everybody meets in the head office. You can imagine a scenario now where you think, “How about we just do one meeting a year face to face, and let’s throw a big social event at the same time, and we’ll do the others on Teams?” In that respect, online meetings are a real complement to aviation, but for some of the important entrepreneurial meetings, like pitches and conferences, where face-to-face meetings are important, it continues to be as important as ever. As to why there might be a reduction, the high ticket prices at Heathrow could in part explain that, so there are lots of different factors at play.

Brian, in terms of the timing of the announcement, two weeks ago the Chancellor announced that the Government would support Heathrow as part of a wider package of growth proposals, and it was only today that we had the confirmation from Heathrow that they wanted to go for runway 3 and expanded capacity at the current terminals. Assuming the Government started this process, do you feel they have done the necessary groundwork to support the policy, given the time elapsed and the significant changes since the Department’s last appraisal?

I certainly would not want the enormous work the Airports Commission did to be repeated. There would be value in examining some of the key issues. We have talked about the importance of the hub status. New narrow-body aircraft with extra-long range are coming along that can provide long-haul distances between cities where before it was not viable. It would be worth having a look at some of those issues. Of course, we haven’t discussed the cost. One of the issues in the Airports Commission review was that a third runway was a very expensive option, which meant that, although there were big benefits, the net gain was not very large.

I think an awful lot has changed. The Airports Commission did an options assessment, in a sort of interim phase, although I look to my colleague who is more expert on what went on there. I believe that that options assessment, in terms of different ways of fulfilling the UK’s transport connectivity needs, identified things like EU legislation as an obstacle to some of the options they could have explored. That has now been removed. The change in trends in business passengers has to be explored. I may be putting words into the Government’s mouth, but I think they want green growth, so there is an exercise here: can we secure growth benefits without the environmental cost? Are there other options available to optimise what we can do with the system? We should probably be looking at the hub-and-spoke approach because the world is moving on. Schiphol is the classic example of another hub airport that we are in competition with, yet over there they are also having this debate. The airport itself has produced reports saying it is not sure that its own growth is in the societal interest. When major competitors are asking those types of questions, the world has changed and the Government need to have a careful look at what their strategic aims are for aviation, alongside other issues like the fact that the channel tunnel is 50% below capacity. We have assets. Why not sweat those assets in ways that don’t damage the climate as much as, for example, the Heathrow case would?

The hub-and-spoke model has been mentioned a few times. As a passive observer of the aviation sector, I see that over the last 20 years there has been a debate about whether we should go to even bigger aircraft to connect between these hubs, or whether there should be more point to point. Going back to Edinburgh, because I have to mention Edinburgh, the Scottish Indian community would be delighted to have a direct connection between India and Edinburgh rather than going via Heathrow. I thought we had moved away from hub and spoke, but investment in Heathrow is about hub and spoke. You are shaking your head. Hub and spoke is here to stay?

I think it is, but it is both. There are new aircraft that are able to operate between cities economically, which they were not able to do before, and offer point-to-point services, but those same aircraft are being used to make the spokes of the hub more effective. The majority of cities have to get service via a hub because there aren’t enough passengers to offer a viable direct service. I think that will be with us forever. We will need a hub-and-spoke airport, but new technologies are opening new opportunities for direct service.

And that argument applies equally to freight.

Freight does not care whether or not there is a direct service. A box can go anywhere; it is just the economics, the cheapness of it. It is important mostly for business passengers.

And perishable goods.

Yes.

On the point about hub and spoke, in evidence previously given to the Committee on the aviation national policy statement, they found that an expanded third runway at Heathrow would provide between seven and 11 more long-haul destinations from Heathrow. At UK level, the modelling at the time found that it was one more destination, so six to 10 were being taken from other airports where they would have been point to point.

We should recognise that that comes with job losses. NEF put in a freedom of information request to DFT in about 2020 to ask for its analysis of the impact of Heathrow expansion on the wider regions. What that showed was that, although we keep hearing the figure of 100,000 jobs, which has an awful lot of problems with it, one of the problems is that it is not the aggregate UK level change; it is jobs in the south-east. There were potential job losses of up to 27,000 around the wider regions. They would be lost particularly in the wider regional airports, because they could serve those routes and they would move to Heathrow if they did not. I think we need a more transparent conversation about exactly how the different approaches to the system affect economic factors like those jobs.

Is that 27,000 estimate a net loss figure?

That was the number of jobs that would be displaced—the upper bound. The 100,000 figure is the upper bound. The 27,000 figure is the upper bound of the number of jobs that would be displaced from the UK’s wider regions to London and the south-east under the third runway scenario.

That is not taking account of jobs that might be created; it is the gross rather than net figure.

In the wider regions?

Yes.

That is the direct job loss; it is a net figure for those regions, but not counting wider economic impacts in direct and indirect jobs.

Those are figures that people can find on NEF’s—

That is in our “Baggage claim” report.

On the regional point, it is great that some regional airports can have long-haul connections, but typically there are limits to how far regional airports can go in terms of air connectivity. Obviously, much smaller airports can have lots of connections to big cities in Europe and sun and sand destinations, and maybe the odd long-haul connection to New York—you have a good example in Edinburgh—but the hub will always be key for the more secondary cities in China and India. I don’t think we will see long-haul connections from regional airports to secondary cities in China any time soon. That will always come through the hub. You gave some figures about the net change in connections and how they may be taking some connections away. If expansion leads to more flights to secondary cities in India or China and other places in the emerging market, it is that they do not exist already. It is not as if we will be taking some of those Chinese flights away from regional airports; they do not exist at the moment. They will be at Heathrow, the hub.

I want to ask about regional airports as well. We have East Midlands very close to Derby. What role do regional airports play in their local economies?

I suppose it is similar to what I described before in general terms. Obviously, they facilitate lots of different activities: business, leisure, visiting friends and relatives inbound and outbound and so on. Long-haul connectivity to some of the emerging markets will realistically still probably have to come through a hub, whether that is Heathrow or another hub airport. Those airports still provide productivity and wellbeing benefits as well for those regions.

Does anybody else want to talk about the regional benefits?

I have nothing to add. I agree.

In a way, I was pleased to hear Chris being a bit critical of the kinds of assessments where people say that there are so many jobs that an airport has brought. We have to be careful when we look, for example, at an economic impact report from East Midlands airport and divide by the number of passengers or flights and say that if we add 10,000 flights we get that many extra benefits, because that is not how it works.

We need to have a candid conversation about exactly what these airports are doing. If we are talking about wider regional airports that are 80% outbound passengers and 20% incoming, and 90% of those passengers are leisure, we need to have a conversation about whether it is useful for the UK to encourage such large volumes of leisure passengers to fly out of a region. It is not just about those people having to go; it is about the incentives we put in front of them.

East Midlands has a lot of freight, so it is slightly different.

It is mainly freight, yes. To go back to the potential for economic growth outside airports in the south-east, what opportunities are there for economic growth delivered at regional level but for nationwide benefit?

I agree with Marc that we shouldn’t focus on the jobs the airport might create in its supply chain, but on the use of that airport. East Midlands is a major cargo centre. That is of great value to businesses and the UK. Expanding that exposure to trade expands the market for local businesses, as well as others that might connect through that centre.

I would be in favour of those kinds of regional airport expansions where they are justified, but the problem we have seen is that there are not that many well-justified cases for expansion; they are all basically the same points about business growth due to business passengers and, as we have discussed, there has been no business passenger growth. They are all very shaky in terms of what they are promoting. That is something that at this point should be recognised in the debate over the last five years.

Heathrow has a problem. The third runway feels a little like a solution looking for a problem in that regard. Do you think the Government have been honest in looking at the comparative benefits of, say, a third runway at Heathrow versus serious regional airport expansion, or even something specific? If we are talking about trying to stimulate the right sorts of travel—business, trade-related—airports like Milan Linate exist in areas where economic growth is viable and much more possible. Do you think a proper scenario analysis has been done outside the Heathrow argument?

For me, no. I feel that our national conversation on this issue is quite detached from the wider evidence base in the academic literature on exactly what is going on in aviation. The harsh reality is that there is a large number of studies just from the last few years suggesting that what you get from aviation expansion are diminishing returns. The higher your GDP and connectivity, the less you get back from each one that you add. That conversation is going on outside the UK, but I don’t think the Government have had a proper look at that evidence for quite some time. I would like to see them at least do that before we barrel ahead with what is potentially on the table at the moment, because there is a lot at stake with the climate crisis. Our bar should not just be that there might be a bit of benefit. Given the risks entailed, our bar needs to be that there is an outstanding, clear and overwhelming level of benefit nailed on. I don’t feel we are at that point at the moment.

We need to provide new airport capacity where it is needed. London will soon be full, but Heathrow has been full for 20 years. There is a clear case there. I am not sure that is the case at many of the UK’s regional airports. I would provide it only if there was real demand. The real issue, which has been discussed already, is the climate impact of this. I am not in favour of addressing that climate impact by constraining activity and not expanding a productive asset. We should do more to address climate impacts, but I don’t think that constraining airport capacity is one of those things.

Those are two very interesting but perhaps quite separate arguments. I have some sympathy with constraint as a way of reducing carbon emissions, but to go back to the furrow, if you like, of alternative or maybe quite radical or creative regional expansion, I don’t mean current airports. If you look at where capacity is in shortest supply, you will end up looking at London and the south-east, but is that really where the opportunity for connectivity and economic growth exists?

On that point, we have constraints at Heathrow. That is the market telling us it wants more capacity at Heathrow, with airlines buying slots from each other for millions of pounds. If you think about other regional airports, I agree with Brian that generally there aren’t really constraints. We can build another runway in regional airports, but I don’t think they necessarily have a capacity problem; it is the demand. Generally, you should only be expanding something if there is clear evidence of constraints, knowing that when you can then ease that constraint you will expect to see an increase in activity.

I think that makes a number of fundamental assumptions about where economic growth can and cannot happen, but I will leave it there.

For me, because it is at capacity and, therefore, must be expanded is not an industrial strategy from a Government. There is a lot more to look into than just that basic fact. Take another transport example. If a motorway or a road is getting very busy, you can make the road bigger, but you can also build a railway. There are other options. To go back to my original point, yes, it may be receiving a lot of demand, but that demand is a complex mix of signals, from market related to carbon taxation and other forms of taxation and demand, not just an inevitability that it will always remain that way and should remain that way.

We need to move on.

I want to ask some questions about the Frontier Economics report specifically. Mr Cuttle, at the end of last month the Chancellor quoted your analysis and your finding that there could be £184 billion in GDP benefits over a 60-year period using a CGE model, which I am looking to understand a bit better. In layman’s terms, could you explain what sets your approach apart from previous analysis and perhaps more traditional input and output modelling?

Like the Airports Commission, we carried out two main pieces of analysis. We carried out the CGE model, which I can talk about in a second, and we also carried out a bottom-up cost-benefit analysis, which was the Airports Commission main approach as well. The bottom-up approach is basically where you list the main impacts of expansion and try to estimate them separately: construction costs, environmental costs and so on. You add them to the cost side. Then you think about the benefits and add them to the benefits side. You add them all up and see what the net benefit is. That was the Airports Commission main approach and we also looked at that approach. The CGE model is a computable general equilibrium model—quite long syllables. They are quite complex mathematical models of an economy. They are, to be honest, real works of art. It models all the different sectors buying and selling goods with each other. It can model how an expansion in one sector, in this case the transport sector, leads to changes in buying and selling of goods with other sectors as well. When the Airports Commission first looked at this they noted that it was novel and innovative; it was not the main approach that they looked at. Since then the science around CGE models has been improving. The UK Government themselves have started to look at CGE models; they are also used in the US and by the World Bank and the European Commission. When we have such a politically sensitive, complex issue, it makes sense to look at different approaches. Our two models basically point to broadly the same answer, which is a strong net positive case for expansion, so I take some comfort from the fact that both separate approaches point to that answer.

Looking back at the work undertaken for the Airports Commission—other witnesses might want to come to this in a moment—PricewaterhouseCoopers undertook its own CGE model. If memory serves, the technical advice, which I think Professor Pearce was part of, said it was the right general approach but it was probably premature in terms of the quality of the data and the assumptions behind it. I am probably not doing the advice justice, but it was words to that effect. What account have you taken of that criticism? You said that the modelling had advanced in the last 10 years. For a non-technical audience, what does that mean?

These models have been around for about 30 years and they are becoming more and more sophisticated and detailed; they are becoming larger as well, because they are models of the entire economy. Where CGE models add a lot of value is that they can shed insights on two main points. One is the thing about crowding in and crowding out and the other is regional impacts. On crowding in and crowding out, we know that expansion at Heathrow will lead to investment at Heathrow, but it will be supplemented with other private investment. Other private companies will say, “We’ll invest as well. We might build a hotel at the new airport.” That would be an example of crowding in, where investment leads to further investment. An example of crowding out would be where Heathrow expansion was such a huge project that it would soak up labour and finance from other sectors, leading to higher prices and contractions in those other sectors as well. That is an example of crowding out. CGE models do a good job at showing the second and third-order effects of the interventions. They also have the regional angle. They model different regions of the UK. They recognise that there are different populations with different resources and how a change at Heathrow can, through the input and output tables, lead to impacts in other regions as well. These models are improving. The UK Government are now using them; the European Commission and World Bank are using them as well. They will continue to improve.

Would anyone else on the panel like to come in on the merits of the general approach, or the Frontier analysis specifically?

I cannot really comment on the Frontier analysis; I have only seen the executive summary of the report. As you said, I was involved in reviewing the PwC work, which did the equilibrium modelling to try to generate the GDP impact of a third runway. At the time my colleague, Peter Mackie, and I agreed with what Chris has just said. That approach is very useful to see whether an investment, rather than making a net benefit to an economy, is just pulling resources away from another sector or region. That is very good value. The models are widely used for things like tax and VAT changes. When we looked at them a decade ago, they were much less advanced in seeing whether something like an airport in a particular sector would create a productivity gain that rippled throughout the economy. The PwC results were bolted on to the CGE model rather than the product of the model itself, so we were very cautious about interpreting the results.

I will echo you from one decade ago. One of your criticisms was about the transparency of these types of model where we have seen only an executive summary. I would enjoy reading through the appendices, where I can see what your view of the world is that goes into the model, and what assumptions you have made about changes. That is the critical thing, because tweaking those numbers changes the result by billions. On the bottom-up approach, there is an issue about what we can see. You may have calculated a bunch of different things. You have told us only three of them: private sector, environment and HMT. Well, if HMT gains, someone is paying the tax, so where is that coming from? It is coming from someone’s pocket.

In that example, yes.

So that is negative; it is zero.

Passengers are paying Government extra revenue for—

Yes, so is all of that £14 billion from foreign passengers?

That was from APD, so a mix of UK and foreign.

So some of that comes from British pockets.

Yes, because they are flying.

I am conscious that time is tight. Dr Chapman, do you want to comment?

I have quite a few concerns. There are questions about the Chancellor announcing this figure to the nation without us being able to see the original documentation and what went into it. I used to be in academia before I got my job in NEF. They love big, complicated models, but there are two things: first, they would describe them as a black box. They get bigger and more complicated and you cannot possibly check what is going on there. As a result, they would say it is rubbish in, rubbish out, which means that the forecast assumptions that go in matter a lot. They then get processed through all sorts of complicated ways that we cannot see and a big number is spat out. It is interesting that you say that basically this number supports what the Airports Commission produced 10 years ago, but so much has changed since then. After 10 years, business passengers have not grown at all. We have had Brexit and global economic stagnation, yet somehow the number that comes out is just the same. For me, that requires a lot of interrogation.

You will anticipate my final question. The executive summary alone has been published. Would you provide a copy of the full report to this Committee?

It is basically Heathrow’s report. It contains some commercially sensitive information. I shall certainly have to go through Heathrow, as it has in it commercially sensitive information about costs as well.

We will try asking as well.

I understand that the report will be published at some point. It is down to Heathrow.

Other questions that we lined up have been answered, except for Laurence’s last question on the carbon budget.

Mr Postle, how should the Government seek to balance their economic growth objectives with their net zero targets?

How they should do it is a bit of a policy question for the Government. How I would do it is cost-effectively. The framework of carbon trading and carbon markets is that under a perfect carbon trading system the savings—the reductions—will flow to wherever it is cheapest to do until eventually there is satiation and we reach the budget and the amount of allowances in the system. The issue is that we are not in a perfect carbon market for aviation. Only UK domestic flights are in the UK ETS. For EU destinations, EU flights pay theirs coming in. For any other departure, they have some small capture by CORSIA, another system. Other than that, they are not within the market, especially international arrivals and departures. In addition, it is widely recognised that there are non-CO2 impacts from aviation. It is not just about carbon emissions; it is about the wider climate impacts. These are not in any tradable market and there is no real way to do that at this time, so every emission from aviation is potentially twice as damaging as an emission from a non-aviation source. That tells us that this can be a very good place to try to take mitigation measures, but it also tells us that allowing additional expansion does more damage to the planet or to our carbon goals than other kinds of expansion.

Do you believe that staying within the overall carbon budget limit sets a cap on the economic benefits that could be derived from aviation expansion?

The clue there is around how the assumed carbon price that hits passengers is brought through in that modelling. One of the things from the original Airports Commission work is that, when we were looking at a central carbon price of £227 in 2050, the assumed actual price that air passengers would have to pay was something like £330. We are now at the point where the 2050 price is higher than that in modelling and appraisal. The question then becomes how much of that growth gets constrained naturally through that price and through that limitation, and that becomes the factor.

I have one final question to the whole panel. If Heathrow expansion goes ahead, what carbon trade-offs may need to be made in other sectors? I appreciate that it is a broad topic.

We don’t really need to worry about domestic aviation emissions because there is a cap in the UK ETS. We do need to worry about the international emissions. Most aviation emissions are long haul, so that would be a problem. The policy mechanism at the moment, the CORSIA cap and offset scheme, is ineffective. The Government need to look very closely at how they would effectively mitigate and address long-haul emissions. It could be through the fuel side by tightening up the support for sustainable fuels, but at the moment that is an inconsistency.

Does anyone wish to come in on trade-offs in other parts of the economy?

One thing is worth noting. In the original updated appraisal report looking at airport capacity in the south-east, the Airports Commission had an important assumption that we need to bear in mind: carbon would be capped or traded across all emissions. They used that assumption to remove the carbon cost from the cost-benefit analysis. When we saw what was actually a fairly poor cost-benefit conclusion in the updated appraisal report that was put to Parliament in 2018, it had already had all aircraft high-altitude emissions excluded because of the assumption that the scheme would exist. The scheme does not exist, as we have just heard; CORSIA is ineffective. The assumption there is not robust. Linked to that, the DFT’s WebTAG appraisal has changed dramatically in the intervening years, particularly in 2023. The way you would now cost that would be completely different. You would have to cost the flight emissions inbound and outbound, interestingly, and of course you can apply a multiplier for the non-carbon emissions. If you were to rerun the 2018 appraisal with that new guidance and the new higher carbon values we have just heard about, these schemes are deeply negative from a societal wellbeing point of view. The same exclusions that allow you to pretend that those costs do not exist in the modelling are also present in the Frontier Economics cost-benefit analysis. We are pretending those do not exist because they have been dealt with by a policy that does not exist.

I completely agree with the need to look into CORSIA. It does not at the moment give confidence that it is going to place a cap on emissions from long-haul flights. There needs to be that policy in place so that, like domestic flights and intra-EEA flights, we have a cap. The total cap on emissions will be declining over time. Aviation may have an increasing share of that declining cap, but we will know that we will get to net zero. For long haul, we do not have that confidence yet because of CORSIA, so that needs to be looked into.

I just realised that we did not answer the question about other sectors. Very briefly, it is important because, clearly, in a carbon-traded scenario, particularly with the ETS, and potentially a future traded scenario with other emissions, or in just a general national cap, other sectors lose out if aviation spends the carbon budget. The traded prices get higher. We are talking about steel, manufacturing and chemicals production particularly that purchase those allowances to trade. They get a lot more expensive if the aviation industry is over-consuming or is seeing significant growth. That is one competition effect that I do not think is in any of the economic models that we have seen and discussed today. Secondly, of course, there is the further issue of the proposed solution, sustainable aviation fuel, which will also increase the costs of land and energy, potentially, in the UK if we do it responsibly, and that will drive up costs for other sectors that require those same goods. Again, the models are not doing a good job of capturing the macro effects of that level of competition for a scarce resource.

Thank you very much. We have slightly overrun. I thank the panel very much for your answers to our questions today. If there is anything you feel you did not answer properly or any additional material you would like to make us aware of, please do. This session was recorded on BBC iPlayer, so it is available on catch-up and on the Parliament TV channel. That brings our first panel to an end. I will suspend the meeting for a few moments while our next witnesses take their places at the table.