Heathrow airport proposes reducing charges for UK domestic flights. But will see more destinations?

There was something of a surprise announcement that caught the media’s attention before the Easter break.

Heathrow airport announced that it proposes to reduce its charges to airlines for UK domestic flights by a third from £29.59 to £19.59 per passenger, with effect from 1 January 2016.

This follows the announcement ny Heathrow Airport last month of a route development fund to support up to nine new UK domestic routes.

The rationale for this is that the number of UK domestic destinations from London Heathrow has fallen substantially over the past 25 years and does not compare favourably to rival hubs such as Amsterdam. So Heathrow wishes to encourage many more UK domestic routes.

So will see more UK domestic destinations from London Heathrow?

First, it is important to emphasise that the reduction in charges is, at this stage, only proposal.

It has been put forward by Heathrow as part of a review by the National Connectivity Taskforce into, inter alia, connectivity between UK regions and London’s airports.

The taskforce is to report to the Airports Commission which is, in turn, to report this summer on options for additional runway capacity in the South East of England. So the move is undoubtedly political in its intentions.

But, back to Heathrow and domestic routes.

It is certainly true that connectivity in terms of routes has fallen. Heathrow serves just seven UK destinations (Aberdeen, Belfast, Edinburgh, Glasgow, Leeds-Bradford, Manchester Newcastle).

Durham Tees Valley and Jersey were suspended by bmi prior to its sale to Lufthansa. Virgin Atlantic is in the process of winding down its “Little Red” operation with Manchester suspended, and Aberdeen and Edinburgh to close in September of this year. This will mean that, from September 2015, British Airways will be the sole operator of UK domestic flights to Heathrow.

Cities such as Derry, Dundee, Exeter, Inverness and Newquay and the Isle Of Man are connected to other London airports, but not Heathrow (London Gatwick – Newquay is a subsidised Public Service Obligation route).

There’s also a vast number of UK cities that have no link to London, but have links to Amsterdam (Bristol, Cardiff, Kent and Norwich etc). Though many of these are easily reachable by train from London. It also has to pointed out that Amsterdam is more dependent on connecting traffic than London which, due to its status as a city, benefits from a much larger local “origin and destination” market. British Airways’ long-haul flights typically have, by revenue management policy design, about 40% connecting passengers. This is compared to at least 60% for rival European long-haul airlines.

We do not realistically foresee another airline entering the domestic market at Heathrow.

The biggest barrier to entry at Heathrow is not the cost of landing charges, but slots.

The slots BA had to forfeit to Virgin Atlantic’s “Little Red” were only for certain designated routes and could not be bid for by a new operator for any new routes (somewhat ironically the deadline for other airlines to bid for these slots was the very day of Heathrow Airport’s announcement). The cost of acquiring slots would be simply to high. Consider that in February of this year Scandinavian Airlines sold one Heathrow slot pair for $60m.

Whether British Airways chooses to expand its UK domestic network depends on, inter alia, the availability of suitable aircraft (the smallest aircraft it operates from London Heathrow is an Airbus A319) and the strategy of its parent company, International Airlines Group (“IAG”).

It has to be said that BA’s most recent UK domestic route from Heathrow, Leeds Bradford, whilst growing, has done so slowly. In 2014, 132,325 passengers flew between London Heathrow and Leeds Bradford, compared to 478,510 for Newcastle.

IAG is bidding for Aer Lingus which does serve a number of UK airports that BA doesn’t such as East Midlands Airport, Cardiff and Newquay. It may be that IAG will see Dublin are a more effective hub for feeding traffic from smaller UK airports than slot congested Heathrow.

BA will certainly not turn down the opportunity to launch new UK domestic routes if it can do profitably and this will require routes to provide a mix of business traffic and passengers connecting on to long-haul business & first class flights. There is a logic in contemplating destinations such as Jersey, Inverness and the Isle Of Man, but we suspect a vast number of new destinations is wishful thinking at best.

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